<PAGE>
As filed with the Securities and Exchange
Commission on May 1, 1997
File Nos. 33-18647
811-5398
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 21 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 X
_______________________________________________
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1345 Avenue of the Americas, New York, New York 10105
(Address of Principal Executive Office) (Zip Code)
Registrants Telephone Number, including
Area Code: (800) 221-5672
_______________________________________________
EDMUND P. BERGAN, JR.
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
(Name and address of agent for service)
Copies of communications to:
Thomas G. MacDonald
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
It is proposed that this filing will become effective
(check appropriate box)
X immediately upon filing pursuant to paragraph (b)
on (date) pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)
on (date) pursuant to paragraph (a) of rule 485.
<PAGE>
Registrant has registered an indefinite number of shares of
common stock pursuant to Rule 24f-2 under the Investment Company
Act of 1940. Registrants Rule 24f-2 notice for its fiscal year
ended December 31, 1996 was filed on February 26, 1997.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
N-1A ITEM NO. LOCATION IN PROSPECTUS
(Caption)
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Expense Information
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Description of the Portfolios
Item 5. Management of the Fund Management of the Fund;
General Information
Item 6. Capital Stock and Other Securities General Information; Dividends,
Distributions and Taxes
Item 7. Purchase of Securities Being Offered Purchase and Redemption of
Shares; General Information
Item 8. Redemption or Repurchase Purchase and Redemption of
Shares; General Information
Item 9. Pending Legal Proceedings Not Applicable
PART B LOCATION IN STATEMENT
OF ADDITIONAL INFORMATION
(Caption)
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Management of the Fund;
General Information
Item 13. Investment Objectives and Policies Investment Policies and
Restrictions
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 404 (c))
PART B
(Continued)
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal Management of the Fund;
Holders of Securities General Information
Item 16. Investment Advisory and Other Management of the Fund
Services
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities General Information
Item 19. Purchase, Redemption and Pricing Purchase and
of Securities Being Offered Redemption of Shares;
Net Asset Value
Item 20. Tax Status Dividends, Distributions
and Taxes
Item 21. Underwriters General Information
Item 22. Calculation of Performance Data General Information
Item 23. Financial Statements Financial Statements; Report
of Independent Auditors
<PAGE>
<PAGE>
[LOGO OF ALLIANCE CAPITAL APPEARS HERE]
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
- -------------------------------------------------------------------------------
P.O. BOX 1520, SECAUCUS, NEW JERSEY 07096-1520
TOLL FREE (800) 221-5672
- -------------------------------------------------------------------------------
Alliance Variable Products Series Fund, Inc. (the "Fund") is an open-end se-
ries investment company designed to fund variable annuity contracts and vari-
able life insurance policies to be offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios") described be-
low which have differing investment objectives and policies.
- -------------------------------------------------------------------------------
A DIVERSIFIED SELECTION OF INVESTMENT ALTERNATIVES
- -------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO -- seeks safety of principal, maintenance of liquidity
and maximum current income by investing in a broadly diversified portfolio of
money market securities. An investment in the Money Market Portfolio is nei-
ther insured nor guaranteed by the U.S. Government. There can be no assurance
that the Portfolio will be able to maintain a stable net asset value of $1.00
per share, although it expects to do so.
PREMIER GROWTH PORTFOLIO -- seeks growth of capital rather than current in-
come. In pursuing its investment objective, the Premier Growth Portfolio will
employ aggressive investment policies. Since investments will be made based
upon their potential for capital appreciation, current income will be inciden-
tal to the objective of capital growth. The Portfolio is not intended for in-
vestors whose principal objective is assured income or preservation of capi-
tal.
GROWTH AND INCOME PORTFOLIO -- seeks to balance the objectives of reasonable
current income and reasonable opportunities for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO -- seeks a high level of cur-
rent income consistent with preservation of capital by investing principally
in a portfolio of U.S. Government Securities and other high grade debt securi-
ties.
HIGH-YIELD PORTFOLIO -- seeks the highest level of current income available
without assuming undue risk by investing principally in high-yielding fixed
income securities. As a secondary objective, this Portfolio seeks capital ap-
preciation where consistent with its primary objective. Many of the high-
yielding securities in which the High-Yield Portfolio invests are rated in the
lower rating categories (i.e., below investment grade) by the nationally rec-
ognized rating services. These securities, which are often referred to as
"junk bonds," are subject to greater risk of loss of principal and interest
than higher rated securities and are considered to be predominantly specula-
tive with respect to the issuer's capacity to pay interest and repay princi-
pal.
TOTAL RETURN PORTFOLIO -- seeks to achieve a high return through a combination
of current income and capital appreciation by investing in a diversified port-
folio of common and preferred stocks, senior corporate debt securities, and
U.S. Government and agency obligations, bonds and senior debt securities.
INTERNATIONAL PORTFOLIO -- seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad port-
folio of marketable securities of established non-United States companies (or
United States companies having their principal activities and interests out-
side the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
SHORT-TERM MULTI-MARKET PORTFOLIO -- seeks the highest level of current in-
come, consistent with what the Fund's Adviser considers to be prudent invest-
ment risk, that is available from a portfolio of high-quality debt securities
having remaining maturities of not more than three years.
GLOBAL BOND PORTFOLIO -- seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
(R) :This is a registered mark used under license from the owner, Alliance
Capital Management L.P.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS/May 1, 1997
Investors are advised to carefully read this Prospectus and to retain it for
future reference.
<PAGE>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO -- seeks the highest level of cur-
rent income, consistent with what the Fund's Adviser considers to be prudent
investment risk, that is available from a portfolio of debt securities issued
or guaranteed by the governments of the United States, Canada and Mexico,
their political subdivisions (including Canadian Provinces but excluding the
States of the United States), agencies, instrumentalities or authorities. The
Portfolio seeks high current yields by investing in government securities de-
nominated in local currency and U.S. Dollars. Normally, the Portfolio expects
to maintain at least 25% of its assets in securities denominated in the U.S.
Dollar.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO -- seeks a high level of current income
through investing substantially all of its assets in U.S. and non-U.S. fixed
income securities denominated only in U.S. Dollars. As a secondary objective,
the Portfolio seeks capital appreciation. Substantially all of the Portfolio's
assets will be invested in high yield, high risk securities that are low-rated
(i.e., below investment grade), or of comparable quality and unrated, and that
are considered to be predominately speculative as regards the issuer's capac-
ity to pay interest and repay principal.
UTILITY INCOME PORTFOLIO -- seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies
are designed to take advantage of the characteristics and historical perfor-
mance of securities of utilities companies. The utilities industry consists of
companies engaged in the manufacture, production, generation, provision,
transmission, sale and distribution of gas, electric energy, and communica-
tions equipment and services, and in the provision of other utility or utili-
ty-related goods and services.
CONSERVATIVE INVESTORS PORTFOLIO -- seeks the highest total return without, in
the view of the Fund's Adviser, undue risk to principal by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO -- seeks the highest total return consistent with
what the Fund's Adviser considers to be reasonable risk by investing in a di-
versified mix of publicly traded equity and fixed-income securities.
GROWTH PORTFOLIO -- seeks long-term growth of capital by investing primarily
in common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO -- seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are un-
dergoing, or have undergone, privatization. The balance of the Portfolio's in-
vestment portfolio will include equity securities of companies that are be-
lieved by the Fund's Adviser to be beneficiaries of the privatization process.
TECHNOLOGY PORTFOLIO -- seeks growth of capital through investment in compa-
nies expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
QUASAR PORTFOLIO -- seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of eq-
uity Securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
REAL ESTATE INVESTMENT PORTFOLIO -- seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or re-
lated to the real estate industry.
- -------------------------------------------------------------------------------
PURCHASE INFORMATION
- -------------------------------------------------------------------------------
The Fund will offer and sell its shares only to separate accounts of certain
life insurance companies, for the purpose of funding variable annuity con-
tracts and variable life insurance policies. Sales will be made without sales
charge at each Portfolio's per share net asset value. Further information can
be obtained from Alliance Fund Services, Inc. at the address or telephone num-
ber shown above.
An investment in the Fund is not a deposit or obligation of, or guaranteed or
endorsed by, any bank and is not federally insured by the Federal Deposit In-
surance Corporation, the Federal Reserve Board or any other agency.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
This Prospectus sets forth concisely the information which a prospective in-
vestor should know about the Fund and each of the Portfolios before applying
for certain variable annuity contracts and variable life insurance policies
offered by participating insurance companies. It should be read in conjunction
with the Prospectus of the separate account of the specific insurance product
which accompanies this Prospectus. A "Statement of Additional Information"
dated May 1, 1997, which provides a further discussion of certain areas in
this Prospectus and other matters which may be of interest to some investors,
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call or write Alliance Fund Services,
Inc. at the address or telephone number shown above.
2
<PAGE>
- -------------------------------------------------------------------------------
EXPENSE INFORMATION
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
The Fund has no sales load on purchases or reinvested dividends, deferred
sales load, redemption fee or exchange fee. Shareholder transaction expenses
shown are net of expense reimbursement.
<TABLE>
<CAPTION>
U.S.
GROWTH GOVERNMENT/
MONEY PREMIER AND HIGH GRADE HIGH TOTAL
MARKET GROWTH INCOME SECURITIES YIELD RETURN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO* PORTFOLIO
--------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ .50% .72% .63% .54% 0% .46%
Other Expenses......... .19% .23% .19% .38% .95% .49%
--- --- --- --- --- ---
Total Portfolio
Operating Expenses.... .69% .95% .82% .92% .95% .95%
=== === === === === ===
</TABLE>
- --------
* Estimated.
<TABLE>
<CAPTION>
SHORT- NORTH
TERM AMERICAN GLOBAL
INTER- MULTI- GLOBAL GOVERNMENT UTILITY DOLLAR CONSERVATIVE
NATIONAL MARKET BOND INCOME INCOME GOVERNMENT INVESTORS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ .04% 0% .44% .19% .19% 0% .30%
Other Expenses......... .91% .95% .50% .76% .76% .95% .65%
--- --- --- --- --- --- ---
Total Portfolio
Operating Expenses.... .95% .95% .94% .95% .95% .95% .95%
=== === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
GROWTH WORLDWIDE REAL ESTATE
INVESTORS GROWTH PRIVATIZATION TECHNOLOGY QUASAR INVESTMENT
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO** PORTFOLIO** PORTFOLIO(1)**
--------- --------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees........ 0% .74% .10% .33% 0% 0%
Other Expenses......... .95% .19% .85% .62% .95% .95%
--- --- --- --- --- ---
Total Portfolio
Operating Expenses.... .95% .93% .95% .95% .95% .95%
=== === === === === ===
</TABLE>
- --------
** Annualized.
(1) Inception (1/9/97) through 3/31/97.
3
<PAGE>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return (cumulatively through the end of each time period).
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio......................... $ 7 $22 $38 $ 86
Premier Growth Portfolio....................... $10 $30 $53 $117
Growth and Income Portfolio.................... $ 8 $26 $46 $101
U.S. Government/High Grade Securities Portfo-
lio........................................... $ 9 $29 $51 $113
High Yield Portfolio........................... $10 $30 $53 $117
Total Return Portfolio......................... $10 $30 $53 $117
International Portfolio........................ $10 $30 $53 $117
Short-Term Multi-Market Portfolio.............. $10 $30 $53 $117
Global Bond Portfolio.......................... $ 9 $30 $52 $115
North American Government Income Portfolio..... $10 $30 $53 $117
Utility Income Portfolio....................... $10 $30 $53 $117
Global Dollar Government Portfolio............. $10 $30 $53 $117
Conservative Investors Portfolio............... $10 $30 $53 $117
Growth Investors Portfolio..................... $10 $30 $53 $117
Growth Portfolio............................... $10 $30 $51 $114
Worldwide Privatization Portfolio.............. $10 $30 $53 $117
Technology Portfolio........................... $10 $30 $53 $117
Quasar Portfolio............................... $10 $30 $53 $117
Real Estate Investment Portfolio............... $10 $30 $53 $117
</TABLE>
4
<PAGE>
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
and indirectly. "Other Expenses" for the High Yield Portfolio are based on es-
timated amounts for such Portfolio's current fiscal year. Expense Information
for the Money Market Portfolio, Premier Growth Portfolio, U.S. Government/High
Grade Securities Portfolio, Total Return Portfolio, International Portfolio,
Growth and Income Portfolio, Short-Term Multi-Market Portfolio and Global Bond
Portfolio have been restated to reflect current fees. The expenses listed in
the table for the Money Market Portfolio, Premier Growth Portfolio, Growth and
Income Portfolio, U.S. Government/High Grade Securities Portfolio, High Yield
Portfolio, Total Return Portfolio, International Portfolio, Short-Term Multi-
Market Portfolio, Global Bond Portfolio, North American Government Income Port-
folio, Global Dollar Government Portfolio, Utility Income Portfolio, Conserva-
tive Investors Portfolio, Growth Investors Portfolio, Growth Portfolio, World-
wide Privatization Portfolio, Technology Portfolio, Quasar Portfolio and Real
Estate Investment Portfolio are net of voluntary expense reimbursements, which
are not required to be continued indefinitely; however, the Adviser intends to
continue such reimbursements for the foreseeable future. The expenses of the
following Portfolios, before expense reimbursements, would be: Money Market
Portfolio: Management Fees -- .50%, Other Expenses -- .19% and Total Portfolio
Operating Expenses -- .69%; Premier Growth Portfolio: Management Fees -- 1.00%,
Other Expenses -- .23% and Total Portfolio Operating Expenses -- 1.23%; Growth
and Income Portfolio: Management Fees -- .63%, Other Expenses -- .19% and Total
Portfolio Operating Expenses -- .82%; U.S. Government/High Grade Securities
Portfolio: Management Fees -- .60%, Other Expenses -- .38% and Total Portfolio
Operating Expenses -- .98%; Total Return Portfolio: Management Fees -- .63%,
Other Expenses -- .49% and Total Portfolio Operating Expenses -- 1.12%; Inter-
national Portfolio: Management Fees -- 1.00%, Other Expenses -- .91% and Total
Portfolio Operating Expenses -- 1.91%; Short-Term Multi-Market Portfolio: Man-
agement Fees -- .55%, Other Expenses -- 1.54% and Total Portfolio Operating Ex-
penses -- 2.09%; Global Bond Portfolio: Management Fees -- .65%, Other Ex-
penses -- .50% and Total Portfolio Operating Expenses -- 1.15%; North American
Government Income Portfolio: Management Fees -- .65%, Other Expenses -- .76%
and Total Portfolio Operating Expenses -- 1.41%; Global Dollar Government Port-
folio: Management Fees -- .75%, Other Expenses -- 1.22% and Total Portfolio Op-
erating Expenses -- 1.97%; Utility Income Portfolio: Management Fees -- .75%,
Other Expenses -- .76% and Total Portfolio Operating Expenses -- 1.51%; World-
wide Privatization Portfolio: Management Fee -- 1.00%, Other Expenses -- .85%
and Total Portfolio Operating Expenses -- 1.85%; Conservative Investors Portfo-
lio: Management Fees -- .75%, Other Expenses -- .65% and Total Portfolio Oper-
ating Expense --1.40%; Growth Investors Portfolio: Management Fees -- .75%,
Other Expenses -- 1.10% and Total Portfolio Operating Expenses -- 1.85%; Growth
Portfolio: Management Fees --.75%, Other Expenses -- .18% and Total Portfolio
Operating Expenses -- .93%. The estimated expenses of the Technology Portfolio
before expense reimbursements would be: Management Fees -- 1.00%, Other Ex-
penses -- .62% and Total Operating Expenses -- 1.62%. The estimated expenses of
the Quasar Portfolio before expense reimbursements would be: Management Fees --
1.00%, Other Expenses -- 3.44% and Total Operating Expenses -- 4.44%. The es-
timated expenses of the Real Estate Investment Portfolio before expense reim-
bursement would be: Management Fees -- .90%, Other Expenses -- 5.10% and Total
Operating Expenses -- 6.00%. The example should not be considered representa-
tive of future expenses; actual expenses may be greater or less than those
shown.
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following information as to net asset value, ratios and certain supple-
mental data for each of the periods shown below has been audited by Ernst &
Young LLP, the Fund's independent auditors, whose unqualified report thereon
(referring to Financial Highlights) appears in the Statement of Additional In-
formation. The following information should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Information has not been included in the following "Financial
Highlights" tables for the High-Yield Portfolio because the High Yield Portfo-
lio has not yet begun operations. Once these Portfolios have been in operation
for all or a portion of the Fund's fiscal year, the required information will
be set forth for the Portfolios in a "Financial Highlights" table. Further in-
formation about the Fund's performance is contained in the Fund's annual re-
port, which is available without charge upon request.
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, JUNE 26, 1992(A)
---------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 17.80 $ 12.37 $ 12.79 $ 11.38 $10.00
------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. .08(c) .09(c) .03(c) -0-(c) .06(c)
Net realized and
unrealized gain (loss)
on investments........ 3.29 5.44 (.41) 1.43 1.32
------- ------- ------- ------- ------
Net increase (decrease)
in net asset value
from operations....... 3.37 5.53 (.38) 1.43 1.38
------- ------- ------- ------- ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.10) (.03) (.01) (.01) -0-
Distributions from net
realized gains........ (5.37) (.07) (.03) (.01) -0-
------- ------- ------- ------- ------
Total dividends and
distributions......... (5.47) (.10) (.04) (.02) -0-
------- ------- ------- ------- ------
Net asset value, end of
period................ $ 15.70 $ 17.80 $ 12.37 $ 12.79 $11.38
======= ======= ======= ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 22.70% 44.85% (2.96)% 12.63% 13.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $96,434 $29,278 $37,669 $13,659 $3,760
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .95% .95% .95% 1.18% .95%(e)
Expenses, before waiv-
ers and reimburse-
ments................. 1.23% 1.19% 1.40% 2.05% 4.20%(e)
Net investment income.. .52% .55% .42% .22% .96%(e)
Portfolio turnover
rate.................. 32% 97% 38% 42% 14%
Average commission rate
paid(f) $.0609 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND PORTFOLIO
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 12.15 $ 9.82 $11.33 $11.24 $11.10
------- ------- ------ ------ ------
INCOME FROM INVESTMENT OPERA-
TIONS
Net investment income(b).... .67(c) .69(c) .57(c) .77(c) .64
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions............... .01 1.73 (1.16) .43 (.13)
------- ------- ------ ------ ------
Net increase (decrease) in
net asset value from opera-
tions...................... .68 2.42 (.59) 1.20 .51
------- ------- ------ ------ ------
LESS: DIVIDENDS AND DISTRIBU-
TIONS
Dividends from net invest-
ment income................ (.84) (.09) (.62) (.85) (.28)
Distributions from net
realized gains............. (.25) -0- (.30) (.26) (.09)
------- ------- ------ ------ ------
Total dividends and distri-
butions.................... (1.09) (.09) (.92) (1.11) (.37)
------- ------- ------ ------ ------
Net asset value, end of pe-
riod....................... $ 11.74 $ 12.15 $ 9.82 $11.33 $11.24
======= ======= ====== ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(d)................... 6.21% 24.73% (5.16)% 11.15% 4.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)............ $18,117 $11,553 $7,298 $6,748 $5,876
Ratio to average net assets
of:
Expenses, net of waivers and
reimbursements............. .94% .95% .95% 1.50% 1.50%
Expenses, before waivers and
reimbursements............. 1.15% 1.77% 2.05% 1.50% 1.97%
Net investment income....... 5.76% 6.22% 6.01% 4.85% 5.85%
Portfolio turnover rate..... 191% 262% 102% 125% 78%
</TABLE>
- -------
(a) Commencement of operations.
(b) Net of expenses reimbursed or waived by the investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 15.79 $ 11.85 $ 12.18 $ 10.99 $10.35
-------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. .24(c) .27(c) .10 (c) .01(c) .10(c)
Net realized and
unrealized gain (loss)
on investments........ 3.18 3.94 (.16) 1.27 .71
-------- ------- ------- ------- ------
Net increase (decrease)
in net asset value
from operations....... 3.42 4.21 (.06) 1.28 .81
-------- ------- ------- ------- ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.25) (.13) (.10) (.06) (.17)
Distributions from net
realized gains........ (2.56) (.14) (.17) (.03) -0-
-------- ------- ------- ------- ------
Total dividends and
distributions......... (2.81) (.27) (.27) (.09) (.17)
-------- ------- ------- ------- ------
Net asset value, end of
period................ $ 16.40 $ 15.79 $ 11.85 $ 12.18 $10.99
======== ======= ======= ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 24.09% 35.76% (.35)% 11.69% 7.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $126,729 $41,993 $41,702 $22,756 $7,803
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .82% .79% .90% 1.18% .99%
Expenses, before waiv-
ers and reimburse-
ments................. .82% .79% .91% 1.28% 2.09%
Net investment income.. 1.58% 1.95% 1.71% 1.76% 2.42%
Portfolio turnover
rate.................. 87% 150% 95% 69% 49%
Average commission rate
paid(f) $.0602 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
-------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $10.58 $ 9.91 $ 11.07 $ 10.77 $ 10.68
------ ------ ------- ------- -------
INCOME FROM INVESTMENT OP-
ERATIONS
Net investment income(b). .64(c) .82(c) .47(c) .28(c) .63(c)
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions............ .33 (.15) (1.16) .43 (.54)
------ ------ ------- ------- -------
Net increase (decrease)
in net asset value from
operations.............. .97 .67 (.69) .71 .09
------ ------ ------- ------- -------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income......... (.82) -0- (.46) (.41) -0-
Return of capital........ -0- -0- (.01) -0- -0-
------ ------ ------- ------- -------
Total dividends and dis-
tributions.............. (.82) -0- (.47) (.41) -0-
------ ------ ------- ------- -------
Net asset value, end of
period.................. $10.73 $10.58 $ 9.91 $ 11.07 $ 10.77
====== ====== ======= ======= =======
TOTAL RETURN
Total investment return
based on net asset
value(d)................ 9.57% 6.76% (6.51)% 6.62% .84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)......... $7,112 $3,152 $20,921 $23,560 $14,841
Ratio to average net as-
sets of:
Expenses, net of waivers
and reimbursements...... .95% .95% .94% 1.17% .99%
Expenses, before waivers
and reimbursements...... 2.09% 1.30% .99% 1.24% 1.66%
Net investment income.... 6.03% 8.22% 6.52% 6.39% 7.18%
Portfolio turnover rate.. 159% 379% 134% 210% 153%
</TABLE>
- -------
(a) Commencement of operations.
(b) Net of expenses reimbursed by the investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
---------------------------------------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 17, 1992(A)
-------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- ------- ------ ------ ---------------------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $11.66 $ 9.94 $10.72 $ 9.89 $10.00
------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. .66(c) .65(c) .28(c) .43(c) .14(c)
Net realized and
unrealized gain (loss)
on investments........ (.39) 1.25 (.71) .48 (.25)
------- ------- ------ ------ ------
Net increase (decrease)
in net asset value
from operations....... .27 1.90 (.43) .91 (.11)
------- ------- ------ ------ ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.28) (.18) (.21) (.08) -0-
Distributions from net
realized gains........ (.13) -0- (.14) -0- -0-
------- ------- ------ ------ ------
Total dividends and
distributions......... (.41) (.18) (.35) (.08) -0-
------- ------- ------ ------ ------
Net asset value, end of
period................ $11.52 $ 11.66 $ 9.94 $10.72 $ 9.89
======= ======= ====== ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 2.55% 19.26% (4.03)% 9.20% (1.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $29,150 $16,947 $5,101 $1,350 $ 785
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .92% .95% .95% 1.16% .95%(e)
Expenses, before waiv-
ers and reimburse-
ments................. .98% 1.58% 3.73% 5.42% 11.56%(e)
Net investment income.. 5.87% 5.96% 5.64% 4.59% 4.82%(e)
Portfolio turnover
rate.................. 137% 68% 32% 177% 13%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
-------------------------------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A)
------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $12.80 $10.41 $10.97 $10.01 $10.00
------- ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. .27(c) .36(c) .15(c) .15(c) .01
Net realized and
unrealized gain (loss)
on investments ....... 1.66 2.10 (.56) .81 -0-
------- ------ ------ ------ ------
Net increase (decrease)
in net asset value
from operations....... 1.93 2.46 (.41) .96 .01
------- ------ ------ ------ ------
LESS: DIVIDENDS AND DIS-
TRIBUTIONS
Dividends from net in-
vestment income....... (.07) (.07) (.09) -0- -0-
Distributions from net
realized gains ....... (.03) -0- (.06) -0- -0-
------- ------ ------ ------ ------
Total dividends and
distributions......... (.10) (.07) (.15) -0- -0-
------- ------ ------ ------ ------
Net asset value, end of
period................ $ 14.63 $12.80 $10.41 $10.97 $10.01
======= ====== ====== ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 15.17% 23.67% (3.77)% 9.59% .10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (000's omitted).. $25,875 $8,242 $ 750 $ 360 $ 95
Ratio to average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .95% .95% .95% 1.20% 0%
Expenses, before waiv-
ers and reimburse-
ments................. 1.12% 4.49% 19.49% 25.96% 0%
Net investment income.. 2.76% 3.16% 2.29% 1.45% 2.21%(e)
Portfolio turnover
rate.................. 57% 30% 83% 25% 0%
Average commission rate
paid (f).............. $.0593 -0- -0- -0- -0-
</TABLE>
- --------
(a) Commencement of operations.
(b) Net of expenses reimbursed or waived by the investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
--------------------------------------------------------------
YEAR ENDED
DECEMBER 31, DECEMBER 28, 1992(A)
-------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- ------- ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 14.07 $ 12.88 $12.16 $10.00 $10.00
------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income(b). .19(c) .18(c) .10(c) .03(c) -0-
Net realized and
unrealized gain on
investments and foreign
currency transactions... .83 1.08 .72(d) 2.13 -0-
------- ------- ------ ------ ------
Net increase in net asset
value from operations... 1.02 1.26 .82 2.16 -0-
------- ------- ------ ------ ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income....... (.08) (.03) (.02) -0- -0-
Distributions from net
realized gains.......... (.12) (.04) (.08) -0- -0-
------- ------- ------ ------ ------
Total dividends and
distributions........... (.20) (.07) (.10) -0- -0-
------- ------- ------ ------ ------
Net asset value, end of
period.................. $ 14.89 $ 14.07 $12.88 $12.16 $10.00
======= ======= ====== ====== ======
TOTAL RETURN
Total investment return
based on net asset
value(d)................ 7.25% 9.86% 6.70% 21.60% 0%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted)......... $44,324 $16,542 $7,276 $ 688 $ 79
Ratio of average net
assets of:
Expenses, net of waivers
and reimbursements..... .95% .95% .95% 1.20% 0%
Expenses, before waivers
and reimbursements..... 1.91% 2.99% 7.26% 39.28% 0%
Net investment income... 1.29% 1.41% .90% .26% 2.07%(e)
Portfolio turnover rate.. 60% 87% 95% 85% 0%
Average commission rate
paid (f)................ $.0431 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
-----------------------------------------------------
YEAR ENDED
DECEMBER 31, DECEMBER 28, 1992(A)
------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- ------- ------ ----- --------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 1.00 $ 1.00 $ 1.00 $1.00 $1.00
------- ------- ------ ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b).............. .05 .05 .03 .22 -0-
Net realized and
unrealized gain on
investments............ -0- -0- -0- -0- -0-
------- ------- ------ ----- -----
Net increase in net
asset value from
operations............. .05 .05 .03 .22 -0-
------- ------- ------ ----- -----
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income...... (.05) (.05) (.03) (.22) -0-
Distributions from net
realized gains......... -0- -0- -0- -0- -0-
------- ------- ------ ----- -----
Total dividends and
distributions.......... (.05) (.05) (.03) (.22) -0-
------- ------- ------ ----- -----
Net asset value, end of
period................. $ 1.00 $ 1.00 $ 1.00 $1.00 $1.00
======= ======= ====== ===== =====
TOTAL RETURN
Total investment return
based on net asset
value(d)............... 4.71% 4.97% 3.27% 2.25% .02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's omitted). $64,769 $28,092 $6,899 $ 102 $ 30
Ratio of average net
assets of:
Expenses, net of waiv-
ers and reimburse-
ments................. .69% .95% .95% 1.16% 0%
Expenses, before waiv-
ers and reimburse-
ments................. .69% 1.07% 4.46% 68.14% 0%
Net investment income.. 4.64% 4.85% 3.98% 2.15% 3.05%(e)
Portfolio turnover
rate.................. 0% 0% 0% 0% 0%
</TABLE>
- --------
(a) Commencement of operations.
(b) Net of expenses reimbursed by the investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL DOLLAR NORTH AMERICAN GOVERNMENT
GOVERNMENT PORTFOLIO INCOME PORTFOLIO
------------------------------------------ -------------------------------------------------
MAY 2, 1994(A) MAY 3, 1994(A)
YEAR ENDED YEAR ENDED TO YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996 1995 1994
------------ ------------ --------------- ------------ ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.95 $ 9.84 $10.00 $ 10.48 $ 8.79 $10.00
------- ------ ------ -------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. 1.10(c) .92(c) .36(c) 1.26(c) 1.13(c) .50(c)
Net realized and
unrealized loss on in-
vestments and foreign
currency transactions. 1.78 1.32 (.52) .69 .83 (1.71)
------- ------ ------ -------- ------- ------
Net decrease in net
asset value from
operations............ 2.88 2.24 (.16) 1.95 1.96 (1.21)
------- ------ ------ -------- ------- ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income .... (.48) (.13) -0- (.05) (.27) -0-
Distributions from net
realized gains ....... (.03) -0- -0- (.00) -0- -0-
------- ------ ------ -------- ------- ------
Total dividends and
distributions ........ (.51) (.13) -0- (.05) (.27) -0-
------- ------ ------ -------- ------- ------
Net asset value, end of
period................ $ 14.32 $11.95 $ 9.84 $ 12.38 $ 10.48 $ 8.79
======= ====== ====== ======== ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 24.90% 22.98% (1.60)% 18.70% 22.71% (12.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $ 8,847 $3,778 $1,146 $ 16,696 $7,278 $3,848
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .95% .95% .95%(e) .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements........ 1.97% 4.82% 15.00%(e) 1.41% 2.57% 4.43%(e)
Net investment income.. 8.53% 8.65% 6.02%(e) 11.04% 12.24% 8.49%(e)
Portfolio turnover
rate.................. 155% 13% 9% 4% 35% 15%
<CAPTION>
UTILITY GROWTH
INCOME PORTFOLIO PORTFOLIO
------------------------------------------ -------------------------------------------------
MAY 10, 1994(A) SEPTEMBER 15, 1994(A)
YEAR ENDED YEAR ENDED TO YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996 1995 1994
------------ ------------ --------------- ------------ ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.01 $ 9.96 $10.00 $ 14.23 $ 10.53 $10.00
------- ------ ------ -------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income(b)............. .31(c) .30(c) .28(c) .06(c) .17(c) .03(c)
Net realized and
unrealized gain (loss)
on investments........ .62 1.83 (.32) 3.95 3.54 .50
------- ------ ------ -------- ------- ------
Net increase (decrease)
in net asset value
from operations....... .93 2.13 (.04) 4.01 3.71 .53
------- ------ ------ -------- ------- ------
LESS: DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income..... (.09) (.08) -0- (.04) (.01) -0-
Distributions from net
realized gains ....... (.16) -0- -0- (.28) -0- -0-
------- ------ ------ -------- ------- ------
Total dividends and
distributions ........ (.25) (.08) -0- (.32) (.01) -0-
------- ------ ------ -------- ------- ------
Net asset value, end of
period................ $ 12.69 $12.01 $ 9.96 $ 17.92 $ 14.23 $10.53
======= ====== ====== ======== ======= ======
TOTAL RETURN
Total investment return
based on net asset
value(d).............. 7.88% 21.45% (.40)% 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000's
omitted).............. $14,857 $6,251 $1,254 $138,688 $45,220 $5,492
Ratio to average net
assets of:
Expenses, net of
waivers and
reimbursements........ .95% .95% .95%(e) .93% .95% .95%(e)
Expenses, before
waivers and
reimbursements........ 1.51% 3.79% 15.98%(e) .93% 1.27% 4.19%(e)
Net investment income.. 2.61% 2.73% 4.62%(e) .35% 1.31% 1.17%(e)
Portfolio turnover
rate.................. 75% 138% 31% 98% 86% 25%
Average commission rate
paid (f).............. $0.579 -0- -0- $0.578 -0- -0-
</TABLE>
- --------
(a) Commencement of operations.
(b) Net of expenses reimbursed by investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO CONSERVATIVE INVESTORS PORTFOLIO
------------------------------------------------ -----------------------------------------------------------
YEAR ENDED YEAR ENDED SEPTEMBER 23, 1994(A) YEAR ENDED YEAR ENDED OCTOBER 28, 1994(A)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31, DECEMBER 31, TO
1996 1995 DECEMBER 31, 1994 1996 1995 DECEMBER 31, 1994
------------ ------------ --------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 11.17 $10.10 $10.00 $ 11.76 $10.07 $10.00
------- ------ ------ ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income(b)...... .28(c) .32(c) .10(c) .45(c) .51(c) .06(c)
Net realized and
unrealized gain
(loss) on
investments.... 1.78 .78 -0- (.01)(g) 1.20 .01
------- ------ ------ ------- ------ ------
Net increase in
net asset value
from
operations..... 2.06 1.10 .10 .44 1.71 .07
------- ------ ------ ------- ------ ------
LESS: DISTRIBU-
TIONS
Dividends from
net investment
income......... (.10) (.03) -0- (.09) (.02) -0-
Distributions
from net real-
ized gains..... -0- -0- -0- (.04) 0 -0-
------- ------ ------ ------- ------ ------
Total dividends
and distribu-
tions.......... (.10) (.03) -0- (.13) (.02) -0-
------- ------ ------ ------- ------ ------
Net asset value,
end of period.. $ 13.13 $11.17 $10.10 $ 12.07 $11.76 $10.07
======= ====== ====== ======= ====== ======
TOTAL RETURN
Total investment
return based on
net asset
value(d)....... 18.51% 10.87% 1.00% 3.79% 16.99% 0.70%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(000's
omitted)....... $18,807 $5,947 $1,127 $21,729 $7,420 $ 701
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements. .95% .95% .95%(e) .95% .95% .95%(e)
Expenses, before
waivers and
reimbursements. 1.85% 4.17% 18.47%(e) 1.40% 4.25% 20.35%(e)
Net investment
income......... 2.26% 2.96% 4.27%(e) 3.93% 4.65% 3.55%(e)
Portfolio turn-
over rate...... 47% 23% 0% 211% 61% 2%
Average commis-
sion rate
paid(f)........ $.0148 -0- -0- $.0578 -0- -0-
<CAPTION>
REAL ESTATE
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO QUASAR PORTFOLIO INVESTMENT PORTFOLIO
------------------------------------------------ -------------------- ----------------- --------------------
JANUARY 9, 1997(A)
YEAR ENDED YEAR ENDED OCTOBER 28, 1994(A) JANUARY 11, 1996(A) AUGUST 5, 1996(A) TO
DECEMBER 31, DECEMBER 31, TO TO TO MARCH 31, 1997
1996 1995 DECEMBER 31, 1994 DECEMBER 31, 1996 DECEMBER 31, 1996 (UNAUDITED)
------------ ------------ --------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 11.87 $ 9.86 $10.00 $ 10.00 $10.00 $10.00
------- ------ ------ ------- ------ ------
INCOME FROM IN-
VESTMENT OPERA-
TIONS
Net investment
income(b)...... .24(c) .35(c) .04(c) .11(c) .04(c) .10
Net realized and
unrealized loss
on investments. .72 1.67 (.18) .93 .60 .05
------- ------ ------ ------- ------ ------
Net increase
(decrease) in
net asset value
from
operations..... .96 2.02 (.14) 1.04 .64 .15
------- ------ ------ ------- ------ ------
LESS: DISTRIBU-
TIONS
Dividends from
net investment
income......... (.07) (.01) -0- -0- -0- -0-
Distributions
from net real-
ized gains..... (.02) -0- -0- -0- -0- -0-
------- ------ ------ ------- ------ ------
Total dividends
and distribu-
tions.......... (.09) (.01) -0- -0- -0- -0-
------- ------ ------ ------- ------ ------
Net asset value,
end of period.. $ 12.74 $11.87 $ 9.86 $ 11.04 $10.64 $10.15
======= ====== ====== ======= ====== ======
TOTAL RETURN
Total investment
return based on
net asset
value(d)....... 8.18% 20.48% (1.40)% 10.40% 6.40% 1.50%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(000's
omitted)....... $10,709 $4,978 $ 321 $28,083 $8,842 $2,268
Ratio to average
net assets of:
Expenses, net of
waivers and
reimbursements. .95% .95% .95%(e) .95%(e) .95%(e) .95%
Expenses, before
waivers and
reimbursements. 1.85% 6.17% 41.62%(e) 1.62%(e) 4.44%(e) 6.99%
Net investment
income......... 2.01% 3.21% 2.29%(e) 1.17%(e) .93%(e) 1.18%
Portfolio turn-
over rate...... 160% 50% 3% 22% 40% -0-
Average commis-
sion rate
paid(f)........ $.0562 -0- -0- $.0553 $.0511 -0-
</TABLE>
- --------
(a) Commencement of operations.
(b) Net of expenses reimbursed by investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and re-
demption on the last day of the period. Total investment return calculated
for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is re-
quired to disclose its average commission rate per share for trades on
which commissions are charged.
(g) The amount shown in this caption for a share outstanding throughout the
period may not accord with the change in realized and unrealized gains and
losses in the portfolio securities for the period because of timing of
sales and repurchases of portfolio shares in relation to fluctuating mar-
ket values for the portfolio.
11
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
INTRODUCTION TO THE FUND
The Fund was established as a corporation in Maryland. The Fund is an open-end
management investment company commonly known as a "mutual fund" whose shares
are offered in separate series each referred to as a "Portfolio." Because the
Fund offers multiple Portfolios, it is known as a "series fund." Each Portfo-
lio is a separate pool of assets constituting, in effect, a separate fund with
its own investment objectives and policies.
A shareholder in a Portfolio will be entitled to his or her pro rata share of
all dividends and distributions arising from that Portfolio's assets and, upon
redeeming shares of that Portfolio, the shareholder will receive the then cur-
rent net asset value of that Portfolio represented by the redeemed shares.
(See "Purchase and Redemption of Shares"). While the Fund has no present in-
tention of doing so, the Fund is empowered to establish, without shareholder
approval, additional portfolios which may have different investment
objectives.
The Fund currently has 19 Portfolios: the Money Market Portfolio, the Premier
Growth Portfolio, the Growth and Income Portfolio, the U.S. Government/High
Grade Securities Portfolio, the High-Yield Portfolio, the Total Return Portfo-
lio, the International Portfolio, the Short-Term Multi-Market Portfolio, the
Global Bond Portfolio, the North American Government Income Portfolio, the
Global Dollar Government Portfolio, the Utility Income Portfolio, the Conser-
vative Investors Portfolio, the Growth Investors Portfolio, the Growth Portfo-
lio, the Worldwide Privatization Portfolio, the Technology Portfolio, the Qua-
sar Portfolio and the Real Estate Investment Portfolio.
The Fund is intended to serve as the investment medium for variable annuity
contracts and variable life insurance policies to be offered by the separate
accounts of certain life insurance companies.
It is conceivable that in the future it may be disadvantageous for variable
annuity and variable life insurance separate accounts to invest simultaneously
in the Fund. Currently, however, the Fund does not foresee any disadvantage to
the holders of variable annuity contracts and variable life insurance policies
arising from the fact that the interests of the holders of such contracts and
policies may differ. Nevertheless, the Fund's Directors intend to monitor
events in order to identify any material irreconcilable conflicts which may
possibly arise and to determine what action, if any, should be taken in re-
sponse thereto.
The investment objectives and policies of each Portfolio are set forth below.
There can be, of course, no assurance that any of the Portfolios will achieve
its respective investment objectives.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio has different investment objectives which it pursues through
separate investment policies as described herein. The differences in objec-
tives and policies among the Portfolios determine the types of portfolio secu-
rities in which each Portfolio invests,
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and can be expected to affect the degree of risk to which each Portfolio is
subject and each Portfolio's yield or return. Each Portfolio's investment ob-
jectives cannot be changed without approval by the holders of a majority of
such Portfolio's outstanding voting securities, as defined in the Investment
Company Act of 1940, as amended (the "Act"). The Fund may change each Portfo-
lio's investment policies that are not designated "fundamental policies"
within the meaning of the Act upon notice to shareholders of the Portfolio,
but without their approval. The types of portfolio securities in which each
Portfolio may invest are described in greater detail below.
MONEY MARKET PORTFOLIO
The Money Market Portfolio's investment objectives are in the following order
of priority -- safety of principal, excellent liquidity, and maximum current
income to the extent consistent with the first two objectives. An investment
in the Money Market Portfolio is neither insured nor guaranteed by the U.S.
Government. As a matter of fundamental policy, the Money Market Portfolio pur-
sues its objectives by maintaining a portfolio of high quality money market
securities, all of which at the time of investment have remaining maturities
of one year or less (which maturities may extend to 397 days).
The securities in which the Money Market Portfolio invests include: (1) mar-
ketable obligations of, or guaranteed by, the United States Government, its
agencies or instrumentalities (collectively, the "U.S. Government"); (2) cer-
tificates of deposit, bankers' acceptances and interest bearing savings depos-
its issued or guaranteed by banks or savings and loan associations having to-
tal assets of more than $1 billion and which are members of the Federal De-
posit Insurance Corporation; (3) commercial paper of prime quality (i.e.,
rated A-1+ or A-1 by Standard & Poor's Corporation ("S&P") or Prime-1 by
Moody's Investors Service, Inc. ("Moody's") or, if not rated, issued by compa-
nies having outstanding debt securities rated AAA or AA by S&P, or Aaa or Aa
by Moody's) and participation interests in loans extended by banks to such
companies; and (4) repurchase agreements that are collateralized in full each
day by liquid securities of the types listed above. (See "Other Investment
Policies and Techniques -- Repurchase Agreements"). The Money Market Portfolio
may also invest in certificates of deposit issued by, and time deposits main-
tained at, foreign branches of domestic banks described in (2) above, prime
quality dollar-denominated commercial paper issued by foreign companies meet-
ing the criteria specified in (3) above, and in certificates of deposit and
bankers' acceptances denominated in U.S. dollars that are issued by U.S.
branches of foreign banks having total assets of at least $1 billion that are
believed by Alliance Capital Management L.P. ("the Adviser") to be of quality
equivalent to that of other such investments in which the Portfolio may
invest.
The Money Market Portfolio will comply with Rule 2a-7 under the Act, as
amended from time to time, including the diversity, quality and maturity con-
ditions imposed by the Rule. Accordingly, in any case in which there is a
variation between the conditions imposed by the Rule and the Portfolio's
investment policies and restrictions, the Portfolio will be governed by the
more restrictive of the two requirements. See the
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Statement of Additional Information for a further description of Rule 2a-7.
The Portfolio may purchase restricted securities that are determined by the
Adviser to be liquid in accordance with procedures adopted by the Directors of
the Fund. Restricted Securities are securities subject to contractual or legal
restrictions on resale, such as those arising from an issuer's reliance upon
certain exemptions from registration under the Securities Act of 1933, as
amended (the "Securities Act").
PREMIER GROWTH PORTFOLIO
General. The investment objective of the Premier Growth Portfolio is growth of
capital by pursuing aggressive investment policies. Since investments will be
made based upon their potential for capital appreciation, current income will
be incidental to the objective of capital growth. Because of the market risks
inherent in any investment, the selection of securities on the basis of their
appreciation possibilities cannot ensure against possible loss in value, and
there is, of course, no assurance that the Portfolio's investment objective
will be met. The Portfolio is therefore not intended for investors whose prin-
cipal objective is assured income and conservation of capital.
The Portfolio will invest predominantly in the equity securities (common
stocks, securities convertible into common stocks and rights and warrants to
subscribe for or purchase common stocks) of a limited number of large, care-
fully selected, high-quality U.S. companies that, in the judgment of the Ad-
viser, are likely to achieve superior earnings growth. The Portfolio invest-
ments in the 25 such companies most highly regarded at any point in time by
the Adviser will usually constitute approximately 70% of the Portfolio's net
assets. Normally, approximately 40 companies will be represented in the Port-
folio's investment portfolio. The Portfolio thus differs from more typical eq-
uity mutual funds by investing most of its assets in a relatively small number
of intensively researched companies.
The Portfolio will, under normal circumstances, invest at least 85% of the
value of its total assets in the equity securities of U.S. companies. The
Portfolio defines U.S. companies to be entities (i) that are organized under
the laws of the United States and have their principal office in the United
States, and (ii) the equity securities of which are traded principally in the
United States securities markets.
Within the investment framework described herein, Alfred Harrison, who heads
the Adviser's "Large Cap Growth Group," is ultimately responsible for the in-
vestment decisions for the Portfolio. In managing the Portfolio's assets, the
Adviser's investment strategy emphasizes stock selection and investment in the
securities of a limited number of issuers. The Adviser depends heavily upon
the fundamental analysis and research of its large internal research staff in
making investment decisions for the Portfolio. The research staff generally
follows a primary research universe of approximately 600 companies which are
considered by the Adviser to have strong management, superior industry posi-
tions, excellent balance sheets and the ability to demonstrate superior earn-
ings growth. As one of the largest multi-national investment firms, the Ad-
viser has access to considerable information concerning all of the companies
followed, an in-depth understanding of the products, services, markets
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<PAGE>
and competition of these companies and a good knowledge of the managements of
most of the companies in its research universe.
The Adviser's analysts prepare their own earnings estimates and financial mod-
els for each company followed. While each analyst has responsibility for fol-
lowing companies in one or more identified sectors and/or industries, the lat-
eral structure of the Adviser's research organization and constant
communication among the analysts result in decision-making based on the rela-
tive attractiveness of stocks among industry sectors. The focus during this
process is on the early recognition of change on the premise that value is
created through the dynamics of changing company, industry and economic funda-
mentals. Research emphasis is placed on the identification of companies whose
substantially above average prospective earnings growth is not fully reflected
in current market valuations.
The Adviser continually reviews its primary research universe of approximately
600 companies to maintain a list of favored securities, the "Alliance 100,"
considered by the Adviser to have the most clearly superior earnings potential
and valuation attraction. The Adviser's concentration on a limited universe of
companies allows it to devote its extensive resources to constant intensive
research of these companies. Companies are constantly added to and deleted
from the Alliance 100 as fundamentals and valuations change. The Adviser's
Large Cap Growth Group, in turn, further refines, on a weekly basis, the se-
lection process for the Portfolio with each portfolio manager in the Group se-
lecting the 25 such companies which appear to the manager to be most attrac-
tive at their current prices. These individual ratings are then aggregated and
ranked to produce a composite list of the 25 most highly regarded stocks, the
"Favored 25." As noted above, approximately 70% of the Portfolio's net assets
will usually be invested in the Favored 25 with the balance of the Fund's in-
vestment portfolio consisting principally of other stocks in the Alliance 100.
Portfolio emphasis upon particular industries or sectors is a by-product of
the stock selection process rather than the result of assigned targets or
ranges.
In the management of the Portfolio's investment portfolio, the Adviser will
seek to utilize market volatility judiciously (assuming no change in company
fundamentals) to adjust the Portfolio's positions. The Portfolio will strive
to capitalize on apparently unwarranted price fluctuations, both to purchase
or increase positions on weaknesses and to sell or reduce overpriced holdings.
Under normal circumstances, the Portfolio will remain substantially fully in-
vested in equity securities and will not take significant cash positions for
market timing purposes. Rather, during a market decline, while adding to posi-
tions in favored stocks, the Portfolio will tend to become somewhat more
aggressive, gradually reducing somewhat the number of companies represented in
the Portfolio's portfolio. Conversely, in rising markets, while reducing or
eliminating fully valued positions, the Portfolio will tend to become somewhat
more conservative, gradually increasing the number of companies represented in
the Portfolio's portfolio. Through this "buying into declines" and "selling
into strength," the Adviser seeks to gain positive returns in good markets
while providing some measure of protection in poor markets.
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<PAGE>
The Adviser expects the average weighted market capitalization of companies
represented in the Portfolio's portfolio (i.e., the number of a company's
shares outstanding multiplied by the price per share) to normally be in the
range of or exceed the average weighted market capitalization of companies
comprising the Standard & Poor's 500 Composite Stock Price Index, a widely
recognized unmanaged index of market activity based upon the aggregate perfor-
mance of a selected portfolio of publicly traded stocks, including monthly ad-
justments to reflect the reinvestment of dividends and distributions.
The Portfolio intends to invest in special situations from time to time. A
special situation arises when, in the opinion of the Portfolio's management,
the securities of a particular company will, within a reasonably estimable pe-
riod of time, be accorded market recognition at an appreciated value solely by
reason of a development particularly or uniquely applicable to that company
and regardless of general business conditions or movements of the market as a
whole.
Short Sales. The Premier Growth Portfolio may not sell securities short, ex-
cept that it may make short sales "against the box." A short sale is effected
by selling a security which the Portfolio does not own, or if the Portfolio
does own such security, it is not to be delivered upon consummation of the
sale. A short sale is "against the box" to the extent that the Portfolio
contemporaneously owns or has the right to obtain securities identical to
those sold short without payment. Not more than 15% of the value of the Port-
folio's net assets will be in deposits on short sales "against the box."
Puts and Calls. The Premier Growth Portfolio may write call options and may
purchase and sell put and call options written by others, combinations thereof
or similar options. The Portfolio may not write put options. The buyer of an
option, upon payment of a premium obtains, in the case of a put option, the
right to deliver to the writer of the option and, in the case of a call op-
tion, the right to call upon the writer to deliver, a specified number of
shares of a specified stock on or before a fixed date at a predetermined
price.
Writing, purchasing and selling call options are highly specialized activities
and entail greater than ordinary investment risks. When calls written by the
Portfolio are exercised, the Portfolio will be obligated to sell stocks below
the current market price. A call written by the Portfolio will not be sold un-
less the Portfolio at all times during the option period owns either (a) the
optioned securities, or securities convertible into or carrying rights to
acquire the optioned securities, or (b) an offsetting call option on the same
securities.
The Premier Growth Portfolio will not sell a call option written or guaranteed
by it if, as a result of such sale, the aggregate of the Portfolio's securi-
ties subject to outstanding call options (valued at the lower of the option
price or market value of such securities) would exceed 15% of the Portfolio's
total assets. The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed to call op-
tions written by the Portfolio, which, at the time of sale by the Portfolio,
have a remaining term of more than 100 days.
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<PAGE>
As noted, the Portfolio may also purchase and sell put and call options writ-
ten by others, combinations thereof, or similar options, but the aggregate
cost of all outstanding options purchased and held by the Portfolio shall at
no time exceed 10% of the Portfolio's total assets. There are markets for put
and call options written by others and the Portfolio may from time to time
sell or purchase such options in such markets. If an option is not so sold and
is permitted to expire without being exercised, its premium would be lost by
the Portfolio.
Options on Market Indices. The Portfolio may purchase and sell exchange-traded
index options. An option on a securities index is similar to an option on a
security except that, rather than the right to take or make delivery of a se-
curity at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the chosen index is greater than (in the case of a call) or
less than (in the case of a put) the exercise price of the option.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek reasonable
cur-rent income and reasonable opportunity for appreciation through invest-
ments primarily in dividend-paying common stocks of good quality. Whenever the
economic outlook is unfavorable for investment in common stock, investments in
other types of securities, such as bonds, convertible bonds, preferred stock
and convertible preferred stocks may be made by the Portfolio. Purchases and
sales of portfolio securities are made at such times and in such amounts as
are deemed advisable in light of market, economic and other conditions.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
The investment objective of the U.S. Government/High Grade Securities Portfo-
lio is high current income consistent with preservation of capital. In seeking
to achieve this objective, the Portfolio will invest principally in a portfo-
lio of: (i) obligations issued or guaranteed by the U.S. Government and repur-
chase agreements pertaining to U.S. Government Securities, and (ii) other high
grade debt securities rated AAA, AA or A by S&P or Aaa, Aa or A by Moody's or
that have not received a rating but are determined to be of comparable quality
by the Adviser. As a fundamental investment policy, the Portfolio will invest
at least 65% of its total assets in these types of securities, including the
securities held subject to repurchase agreements. The average weighted matu-
rity of the Portfolio's portfolio of U.S. Government securities is expected to
vary between one year or less and 30 years. See "Other Investment Policies and
Techniques -- Fixed-Income Securities." The Portfolio will utilize certain
other investment techniques, including options and futures contracts, intended
to enhance income and reduce market risk. The Portfolio is designed primarily
for long-term investors and investors should not consider it a trading vehi-
cle. As with all investment company portfolios, there can be no assurance that
the Portfolio's objective will be achieved.
The Portfolio is subject to the diversification requirements prescribed by the
U.S. Treasury Department which, among other
17
<PAGE>
things, limits the Portfolio to investing no more than 55% of its total assets
in any one investment. For this purpose, all securities issued or guaranteed by
the U.S. Government are considered a single investment. Accordingly, the U.S.
Government/High Grade Securities Portfolio will limit its purchases of U.S.
Government Securities to 55% of the total assets of the Portfolio. Consistent
with this limitation, the Portfolio will, as a matter of fundamental policy,
invest at least 45% of its total assets in U.S. Government Securities. Never-
theless, the Portfolio reserves the right to modify the percentage of its in-
vestments in U.S. Government Securities in order to comply with all applicable
tax requirements.
U.S. Government Securities. Securities issued or guaranteed by the U.S. Govern-
ment include: (i) U.S. Treasury obligations, which differ only in their inter-
est rates, maturities and times of issuance: U.S. Treasury bills (maturity of
one year or less), U.S. Treasury notes (maturities of one to 10 years), and
U.S. Treasury bonds (generally maturities of greater than 10 years), all of
which are backed by the full faith and credit of the United States; and (ii)
obligations issued or guaranteed by the U.S. Government, including government
guaranteed mortgage-related securities, some of which are backed by the full
faith and credit of the U.S. Treasury, e.g., direct pass-through certificates
of the Government National Mortgage Association; some of which are supported by
the right of the issuer to borrow from the U.S. Government, e.g., obligations
of Federal Home Loan Banks; and some of which are backed only by the credit of
the issuer itself, e.g., obligations of the Student Loan Marketing Association.
See the Statement of Additional Information of the Fund for a description of
obligations issued or guaranteed by the U.S. Government.
High Grade Securities. High grade debt securities which, together with U.S.
Government Securities, will constitute at least 65% of the Portfolio's assets,
include:
1. Debt securities which are rated AAA, AA or A by S&P or Aaa, Aa or A by
Moody's;
2. Obligations of, or guaranteed by, national or state bank holding compa-
nies, which obligations, although not rated as a matter of policy by either
S&P or Moody's, are rated AAA, AA or A by Fitch Investors Services, Inc.
("Fitch");
3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P or Prime-1, Prime-2
or Prime-3 by Moody's; and
4. Bankers' acceptances or negotiable certificates of deposit issued by
banks rated AAA, AA or A by Fitch.
Other Securities. While the Portfolio's investment strategy normally emphasizes
U.S. Government Securities and high grade debt securities, the Portfolio may,
where consistent with its investment objective, invest up to 35% of its total
assets in other types of securities, including, (i) investment grade corporate
debt securities of a type other than the high grade debt securities described
above (including collateralized mortgage obligations), (ii) certificates of de-
posit, bankers' acceptances and interest-bearing savings deposits of banks hav-
ing total assets of more than $1 billion and which are members of the Federal
Deposit Insurance Corporation, and (iii) put and call options, futures con-
tracts and options on futures contracts. Investment grade debt securities de-
scribed in (i) above are those rated BBB or higher by
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<PAGE>
S&P or Baa or higher by Moody's or, if not so rated, are of equivalent invest-
ment quality in the opinion of the Adviser. Securities rated BBB by S&P or Baa
by Moody's nor mally provide higher yields but may be considered to have spec-
ulative characteristics. See "Other Investment Policies and Techniques -- Se-
curities Ratings." " -- Investment in Securities Rated Baa and BBB" and Appen-
dix A.
HIGH-YIELD PORTFOLIO
The primary investment objective of the High-Yield Portfolio is to earn the
highest level of current income available without assuming undue risk by in-
vesting principally in high-yielding fixed-income securities rated Baa or
lower by Moody's or BBB or lower by S&P or, if not rated, of comparable in-
vestment quality as determined by the Adviser. As a secondary objective, the
High-Yield Portfolio will seek capital appreciation, but only when consistent
with its primary objective. Capital appreciation may result, for example, from
an improvement in the credit standing of an issuer whose securities are held
by the Portfolio or from a general decline in interest rates or a combination
of both. Conversely, capital depreciation may result, for example, from a low-
ered credit standing or a general rise in interest rates, or a combination of
both.
Consistent with the High-Yield Portfolio's primary investment objective, it is
anticipated that, under normal conditions, at least 65% of the total assets of
the High-Yield Portfolio will be invested in fixed-income securities rated be-
low Baa by Moody's or below BBB by S&P or, if unrated, of comparable invest-
ment quality as determined by the Adviser. Such highrisk, high-yield securi-
ties (commonly referred to as "junk bonds") are considered to have speculative
or, in, the case of relatively low ratings, predominantly speculative charac-
teristics. See "Other Investment Policies and Techniques -- Securities Rat-
ings," " -- Investments in Lower-Rated Fixed-Income Securities" and Appendix
A. There is no minimum rating requirement applicable to the Portfolio's in-
vestments in fixed-income securities.
When the spreads between the yields derived from lower rated securities and
those derived from higher-rated issues are relatively narrow, the Portfolio
may invest in the higher-rated issues since they may provide similar yields
with somewhat less risk. Fixed-income securities appropriate for the Portfolio
may include both convertible and non-convertible debt securities and preferred
stock.
Municipal Securities. In circumstances where the Adviser determines that in-
vestment in municipal obligations would facilitate the High-Yield Portfolio's
ability to accomplish its investment objectives, it may invest up to 20% of
its assets in such obli- gations, including municipal bonds issued at a dis-
count. Dividends on shares attributable to interest on municipal securities
held by the Portfolio will not be exempt from Federal income taxes.
Public Utilities. The High-Yield Portfolio's investments in public utilities,
if any, may be subject to certain risks incurred by the Portfolio due to Fed-
eral, state or municipal regulatory changes, insufficient rate increases or
cost overruns.
Mortgage-Related Securities. The High-Yield Portfolio may invest without limi-
tation in
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<PAGE>
mortgage-related securities that provide funds for mortgage loans made to res-
idential homeowners. These include securities which represent interests in
pools of fixed and adjustable mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, commercial banks and others. Pools of
mortgage loans are assembled for sale to investors (such as the High-Yield
Portfolio) by various governmental, government-related and private organiza-
tions.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates. In-
stead, these securities provide for a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal re-
sulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may in addition be the originators of the underlying mortgage loans as well as
the guarantors of the mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or indirect govern-
ment guarantees of payments in such pools. However, timely payment of interest
and principal of these pools is supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance. There
can be no assurance that the private insurers can meet their obligations under
the policies. The High-Yield Portfolio may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experi-
ence and practices of the poolers the Adviser determines that the securities
meet the Portfolio's investment criteria. Although the market for such securi-
ties is becoming increasingly liquid, securities issued by certain private or-
ganizations may not be readily marketable. The High-Yield Portfolio will not
purchase mortgage-related securities or any other assets which in the Advis-
er's opinion are illiquid if, as a result, more than 10% of the value of the
Portfolio's total assets will be illiquid.
The Adviser expects that governmental, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these securities may be
second mortgages or alternative mortgage instruments, that is, mortgage in-
struments whose principal or interest payments may vary or whose terms to ma-
turity may differ from customary long-term fixed rate mortgages. As new types
of mortgage-related securities are developed and offered to investors, the Ad-
viser will, consistent with the High-Yield Portfolio's investment objective
and policies, consider making investments in such new types of securities.
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<PAGE>
The High-Yield Portfolio may invest up to 5% of the value of its total assets
directly in mortgages secured by residential real estate. Unlike pass-through
securities, whole loans constitute direct investment in mortgages inasmuch as
the Portfolio, rather than a financial intermediary, becomes the mortgagee with
respect to such loans purchased by the Portfolio. At present, such investments
are considered to be illiquid by the Adviser.
Writing Covered Put and Call Options. The High-Yield Portfolio may write cov-
ered call options listed on one or more national se-curities exchanges and on
foreign currencies in an aggregate amount not to exceed 25% of its total as-
sets. (See "Other Investment Policies and Techniques -- Writing Covered Call
Options").
In addition to writing covered call options, the High-Yield Portfolio may write
covered put options listed on one or more national securities exchanges and on
foreign currencies. A put option gives the purchaser of the option, upon pay-
ment of a premium, the right to deliver a specified amount of a security to the
writer of the option on or before a fixed date at a predetermined price. When
the High-Yield Portfolio writes a put option it maintains in a segregated ac-
count cash or U.S. Government securities in an amount adequate to purchase the
underlying security should the put be exercised. The High-Yield Portfolio will
not write a put option if, as a result thereof, the aggregate of its portfolio
securities subject to outstanding options (valued at the lower of the option
price or market value of such securities) would exceed 15% of such Portfolio's
total assets.
Purchasing Put and Call Options. In addition to writing put and call options,
the HighYield Portfolio may purchase put and call options written by others
covering the types of securities in which the Portfolio may invest, and may
purchase put and call options on foreign currencies. The Portfolio may purchase
put and call options to provide protection against adverse price or yield ef-
fects from anticipated changes in prevailing interest rates in the same manner
discussed below under "Other Investment Policies and Techniques -- When-Issued
Securities and Forward Commitments." In purchasing a call option, the Portfolio
would be in a position to realize a gain if, during the option period, the
price of the security increased by an amount in excess of the premium paid. It
would realize a loss if the price of the security declined or remained the same
or did not increase during the period by more than the amount of the premium.
By purchasing a put option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the security increased or remained the same or did not decrease during that pe-
riod by more than the amount of the premium. If a put or call option purchased
by the Portfolio were permitted to expire without being sold or exercised, its
premium would represent a realized loss to the Portfolio.
The High-Yield Portfolio may dispose of an option which it has purchased by
entering into a "closing sale transaction" with the writer of the option. A
closing sale transaction terminates the obligation of the writer of the option
and does not result in the ownership of an option. The Portfolio realizes a
profit or loss from a closing sale transaction if the premium received from the
transac-
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<PAGE>
tion is more than or less than the cost of the option.
When the High-Yield Portfolio purchases put or call options, or when it writes
cov-ered put or call options as described above, it does so in negotiated
transactions. The Portfolio effects such transactions only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan institutions) deemed creditworthy by the Adviser, and the Adviser has
adopted procedures for monitoring the creditworthiness of such entities. Op-
tions purchased or written by the Portfolio in negotiated transactions are il-
liquid and it may not be possible for the Portfolio to effect a closing sale
transaction at a time when the Adviser believes it would be advantageous to do
so.
Futures Contracts and Options on Futures. The High-Yield Portfolio may invest
in financial futures contracts ("futures contracts") and related options
thereon. If the Adviser anticipates that interest rates will rise, the Portfo-
lio may sell a futures contract or a call option thereon or purchase a put op-
tion on such futures contracts as a hedge against a decrease in the value of
the Portfolio's securities. If the Adviser anticipates that interest rates
will decline, the Portfolio may purchase a futures contract or a call option
thereon to protect against an increase in the price of the securities the
Portfolio intends to purchase. These futures contracts and related options
thereon will be used only as a hedge against anticipated interest rate
changes.
Subject to appropriate regulatory relief, the Portfolio may not enter into
futures contracts or related options thereon if immediately thereafter the
amount committed to margin plus the amount paid for premiums for unexpired op-
tions on futures contracts exceeds 5% of the value of the Portfolio's total
assets. The Portfolio may not purchase or sell futures contracts or related
options thereon if immediately thereafter more than 30% of its net assets
would be hedged. See "Other Investment Policies and Techniques -- Hedging
Techniques -- Futures Contracts and Options on Futures Contracts."
TOTAL RETURN PORTFOLIO
The investment objective of the Total Return Portfolio is to achieve a high
return through a combination of current income and capital appreciation. The
Total Return Portfolio's assets are invested in U.S. Government and agency ob-
ligations, bonds, fixed-income senior securities (including short and long-
term debt securities and preferred stocks to the extent their value is attrib-
utable to their fixed-income characteristics), preferred and common stocks in
such proportions and of such type as are deemed best adapted to the current
economic and market outlooks. The percentage of the Portfolio's assets in-
vested in each type of security at any time shall be in accordance with the
judgment of the Adviser.
INTERNATIONAL PORTFOLIO
The International Portfolio's primary investment objective is to seek to ob-
tain a total return on its assets from long-term growth of capital principally
through a broad portfolio of marketable securities of established non-United
States companies (e.g., companies incorporated outside the United States),
companies participating in foreign
22
<PAGE>
economies with prospects for growth, and foreign government securities. As a
secondary objective, the Portfolio will attempt to increase its current income
without assuming undue risk. The Adviser considers it consistent with these ob-
jectives to acquire securities of companies incorporated in the United States
and having their principal activities and interests outside of the United
States. The International Portfolio intends to be invested primarily in such
issuers and under normal circumstances more than 80% of its assets will be so
invested.
In seeking its objective, the International Portfolio expects to invest its as-
sets primarily in common stocks of established non-United States companies
which in the opinion of the Adviser have potential for growth of capital or in-
come or both. There is no requirement, however, that the Portfolio invest ex-
clusively in common stocks or other equity securities, and, if deemed advis-
able, the International Portfolio may invest in any other type of security in-
cluding, but not limited to, preferred stocks, bonds, notes and other debt se-
curities of foreign issuers (Euro-dollar securities), warrants, or obligations
of the United States or foreign governments and their political subdivisions.
When the Adviser believes that the total return on debt securities will equal
or exceed the return on common stocks, the International Portfolio may, in
seeking its objective of total return, substantially increase its holdings in
such debt securities. The International Portfolio may establish and maintain
temporary balances for defensive purposes or to enable it to take advantage of
buying opportunities. The International Portfolio's temporary cash balances may
be invested in United States as well as foreign short-term money-market instru-
ments, including, but not limited to, government obligations, certificates of
deposit, bankers' acceptances, commercial paper, short-term corporate debt se-
curities and repurchase agreements.
The International Portfolio intends to diversify investments broadly among
countries and normally to have represented in the portfolio, business activi-
ties of not less than three different countries. The Portfolio may invest all
or a substantial portion of its assets in one or more of such countries. The
Portfolio may purchase securities of companies, wherever organized, which, in
the judgment of the Adviser, have their principal activities and interests out-
side the United States determined on the basis of such factors as location of
the company's assets, or personnel, or sales and earnings. See "Other Invest-
ment Policies and Techniques -- Foreign Securities."
The Portfolio may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Portfolio from ad-
verse changes in the relationship between the U.S. Dollar and other currencies.
A forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The Portfolio's dealings in
forward contracts will be limited to hedging involving either specific transac-
tions or portfolio positions. Transaction hedging is the purchase or sale of
forward contracts with respect to specific receivables or payables of the Port-
folio accruing in connection with the purchase and sale of its portfolio secu-
rities or the payment of dividends and distributions by the Portfolio. Position
hedging is the sale of for-
23
<PAGE>
ward contracts with respect to portfolio security positions denominated or
quoted in such foreign currency. The Portfolio will not speculate in forward
contracts and, therefore, the Adviser believes that the Portfolio will not be
subject to the risks frequently associated with the speculative use of such
transactions. The Portfolio may not position hedge with respect to the cur-
rency of a particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in its portfo-
lio denominated or quoted in that particular foreign currency. If the Portfo-
lio enters into a position hedging transaction, its custodian bank will place
liquid assets in a separate account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of such
forward contract. If the value of the securities placed in the separate ac-
count declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Portfolio's commit-
ment with respect to such contracts. Hedging against a decline in the value of
a currency does not eliminate fluctuations in the prices of portfolio securi-
ties or prevent losses if the prices of such securities decline. Such transac-
tions also preclude the opportunity for gain if the value of the hedge cur-
rency should rise. Moreover, it may not be possible for the Portfolio to hedge
against a devaluation that is so generally anticipated that the Portfolio is
not able to contract to sell the currency at a price above the devaluation
level it anticipates. The Portfolio will not enter into a forward contract
with a term of more than one year or if, as a result thereof, more than 50% of
the Portfolio's total assets would be committed to such contracts.
The Portfolio may also invest in warrants which entitle the holder to buy eq-
uity securities at a specific price for a specific period of time.
It is the present intention of the Adviser to invest the Portfolio's assets in
companies based in (or governments of or within) East Asia (Japan, Hong Kong,
Singapore and Malaysia), Western Europe (the United Kingdom, Germany, The
Netherlands, France and Switzerland), Australia, Canada, and such other areas
and countries as the Adviser may determine from time to time. However, invest-
ments may be made from time to time in companies in, or governments of, devel-
oping countries as well as developed countries. Shareholders should be aware
that investing in the equity and fixed-income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems which can be expected to have less stability
than those of developed countries. The Adviser at present does not intend to
invest more than 10% of the International Portfolio's total assets in compa-
nies in, or governments of, developing countries. On December 31, 1996, 31.5%
of the Portfolio's net assets were invested in debt securities of Japanese is-
suers. For a description of certain risks associated with investing in foreign
securities, see "Other Investment Policies and Techniques -- Foreign Securi-
ties," "-- Investment in Japanese Issuers" and (for a further description of
Japan) Appendix E to the Statement of Additional Information.
SHORT-TERM MULTI-MARKET PORTFOLIO
The investment objective of the Short-Term Multi-Market Portfolio is to seek
the highest
24
<PAGE>
level of current income, consistent with what the Adviser considers to be pru-
dent investment risk, that is available from a portfolio of high-quality debt
securities having remaining maturities of not more than three years. The Port-
folio seeks high current yields by investing in a portfolio of debt securities
denominated in the U.S. Dollar and selected foreign currencies. Accordingly,
the Portfolio will seek investment opportunities in foreign, as well as
domestic, securities markets. While the Portfolio normally will maintain a sub-
stantial portion of its assets in debt securities denominated in foreign cur-
rencies, the Portfolio will invest at least 25% of its net assets in U.S. Dol-
lar-denominated securities. The Portfolio is designed for the investor who
seeks a higher yield than a money market fund or certificate of deposit and
less fluctuation in net asset value than a longer-term bond fund.
In pursuing its investment objective, the Portfolio seeks to minimize credit
risk and fluctuations in net asset value by investing only in shorter-term debt
securities. Normally, a high proportion of the Portfolio's investments consist
of money market instruments. The Adviser actively manages the Portfolio in ac-
cordance with a multi-market investment strategy, allocating the Portfolio's
investments among securities denominated in the U.S. Dollar and the currencies
of a number of foreign countries and, within each such country, among different
types of debt securities. The Adviser adjusts the Portfolio's exposure to each
currency based on its perception of the most favorable markets and issuers. In
this regard, the percentage of assets invested in securities of a particular
country or denominated in a particular currency will vary in accordance with
the Adviser's assessment of the relative yield and appreciation potential of
such securities and the relationship of a country's currency to the U.S.
Dollar. Fundamental economic strength, credit quality and interest rate trends
are the principal factors considered by the Adviser in determining whether to
increase or decrease the emphasis placed upon a particular type of security or
industry sector within the Portfolio's investment portfolio. The Portfolio will
not invest more than 25% of its net assets in debt securities denominated in a
single currency other than the U.S. Dollar.
The Portfolio invests in debt securities denominated in the currencies of coun-
tries whose governments are considered stable by the Adviser. In addition to
the U.S. Dollar, such currencies include, among others, the Australian Dollar,
Austrian Schilling, British Pound Sterling, Canadian Dollar, Danish Krone,
Dutch Guilder, European Currency Unit ("ECU"), French Franc, German Mark, Irish
Pound, Italian Lira, Japanese Yen, New Zealand Dollar, Norwegian Krone, Spanish
Peseta, Swedish Krona and Swiss Franc. An issuer of debt securities purchased
by the Portfolio may be domiciled in a country other than the country in whose
currency the instrument is denominated.
The Portfolio seeks to minimize investment risk by limiting its portfolio in-
vestments to high-quality debt securities having remaining maturities of not
more than three years. Accordingly, the Portfolio's investments consist only
of: (i) debt securities issued or guaranteed by the U.S. government, its agen-
cies or instrumentalities; (ii) obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies, or in-
strumentalities, or by supranational entities, all of which are rated AAA or AA
by
25
<PAGE>
S&P or Aaa or Aa by Moody's ("High Quality Ratings") or, if unrated, determined
by the Adviser to be of equivalent quality; (iii) corporate debt securities
having at least one High Quality Rating or, if unrated, determined by the Ad-
viser to be of equivalent quality; (iv) certificates of deposit and bankers'
acceptances issued or guaranteed by, or time deposits maintained at, banks (in-
cluding foreign branches of U.S. banks or U.S. or foreign branches of foreign
banks) having total assets of more than $500 million and determined by the Ad-
viser to be of high quality; and (v) commercial paper rated A-1 by S&P, Prime-1
by Moody's, Fitch-1 by Fitch Investors Service, Inc., or Duff 1 by Duff &
Phelps Inc. or, if not rated, issued by U.S. or foreign companies having out-
standing debt securities rated AAA, AA or A by S&P, or Aaa, Aa or A by Moody's
and determined by the Adviser to be of high quality.
The Portfolio may invest in debt securities issued by supranational organiza-
tions such as: the International Bank for Reconstruction and Development (com-
monly referred to as the "World Bank"), which was chartered to finance develop-
ment projects in developing member countries; the European Union, which is a
fifteen-nation organization engaged in cooperative economic activities; the Eu-
ropean Coal and Steel Community, which is an economic cooperative whose members
are various European nations' steel and coal industries; and the Asian Develop-
ment Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations in
the Asian and Pacific regions.
The Portfolio may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specified amounts of the currencies of certain of the
member states of the European Union. The specific amounts of currencies com-
prising the ECU may be adjusted by the Council of Ministers of the European
Union to reflect changes in relative values of the underlying currencies. The
Adviser does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
governments and supranationals, in particular, issue ECU-denominated obliga-
tions.
Under normal circumstances, and as a matter of fundamental policy, the Portfo-
lio "concentrates" at least 25% of its total assets in debt instruments issued
by domestic and foreign companies engaged in the banking industry, including
bank holding companies. Such investments may include certificates of deposit,
time deposits, bankers' acceptances, and obligations issued by bank holding
companies, as well as repurchase agreements entered into with banks (as dis-
tinct from non-bank dealers) in accordance with the policies set forth in
"Other Investment Policies and Techniques -- Repurchase Agreements" below. How-
ever, when business or financial conditions warrant, the Portfolio may, for
temporary defensive purposes, vary from its policy of investing at least 25% of
its total assets in the banking industry. For example, the Portfolio may reduce
its position in debt instruments issued by domestic and foreign banks and bank
holding companies and increase its position in U.S. Government Securities or
cash equivalents.
Due to the Portfolio's investment policy with respect to investments in the
banking
26
<PAGE>
industry, the Portfolio will have greater exposure to the risk factors which
are characteristic of such investments. In particular, the value of and invest-
ment return on the Portfolio's shares will be affected by economic or regula-
tory developments in or related to the banking industry. Sustained increases in
interest rates can adversely affect the availability and cost of funds for a
bank's lending activities, and a deterioration in general economic conditions
could increase the exposure to credit losses. The banking industry is also sub-
ject to the effects of: the concentration of loan portfolios in particular
businesses such as real estate, energy, agriculture or high technology-related
companies; national and local regulation; and competition within those indus-
tries as well as with other types of financial institutions. In addition, the
Portfolio's investments in commercial banks located in several foreign coun-
tries are subject to additional risks due to the combination in such banks of
commercial banking and diversified securities activities. As discussed above,
however, the Portfolio will seek to minimize its exposure to such risks by in-
vesting only in debt securities which are determined to be of high quality.
The net asset value of the Portfolio's shares will change as the general levels
of interest rates fluctuate. When interest rates decline, the value of a port-
folio primarily invested in debt securities can be expected to rise. Converse-
ly, when interest rates rise, the value of a portfolio primarily invested in
debt securities can be expected to decline. However, a shorter average maturity
is generally associated with a lower level of market value volatility and, ac-
cordingly, it is expected that the net asset value of the Portfolio's shares
normally will fluctuate less than that of a long-term bond fund.
In order to reduce the Portfolio's exposure to foreign currency fluctuations
versus the U.S. Dollar, the Portfolio will utilize certain investment strate-
gies, including the purchase and sale of forward foreign currency exchange con-
tracts and other currency hedging techniques. For a discussion of these invest-
ment policies of the Portfolio, see "Other Investment Policies and Tech-
niques -- Hedging Techniques," below. For a description of certain risks asso-
ciated with investing in foreign securities, see "Other Investment Policies and
Techniques -- Foreign Securities," below.
GLOBAL BOND PORTFOLIO
The investment objective of the Global Bond Portfolio is to seek a high level
of return from a combination of current income and capital appreciation by in-
vesting in a globally diversified portfolio of high quality debt securities de-
nominated in the U.S. Dollar and a range of foreign currencies. The average
weighted maturity of the Portfolio's portfolio of fixed-income securities is
expected to vary between one year or less and 10 years. See "Other Investment
Policies and Techniques -- Fixed-Income Securities."
Over the past 14 years, debt securities offered by certain foreign governments
provided higher investment returns than U.S. government debt securities. Such
returns reflect interest rates prevailing in those countries and the effect of
gains and losses in the denominated currencies, which have had a substantial
impact on investment in foreign fixed income securities. The relative
27
<PAGE>
performance of various countries' fixed income markets historically has re-
flected wide variations relating to the unique characteristics of each
country's economy. Year-to-year fluctuations in certain markets have been sig-
nificant, and negative returns have been experienced in various markets from
time to time. The Adviser and AIGAM International Limited (the "Sub-Adviser")
believe that investment in a composite of foreign fixed income markets and in
the U.S. government and corporate bond market is less risky than a portfolio
invested exclusively in foreign debt securities, and provides investors with
more opportunities for attractive total return than a portfolio invested ex-
clusively in U.S. debt securities.
The Portfolio will invest only in securities of issuers in countries whose
governments are deemed stable by the Adviser and the Sub-Adviser. Their deter-
mination that a particular country should be considered stable depends on
their evaluation of political and economic developments affecting the country
as well as recent experience in the markets for foreign government securities
of the country. Examples of foreign governments which the Adviser and Sub-Ad-
viser currently consider to be stable, among others, are the governments of
Australia, Austria, Canada, Denmark, France, Germany, Ireland, Italy, Japan,
New Zealand, The Netherlands, Norway, Spain, Sweden, Switzerland and the
United Kingdom. The Adviser does not believe that the credit risk inherent in
the obligations of such stable foreign governments is significantly greater
than that of U.S. government debt securities. The Portfolio intends to spread
investment risk among the capital markets of a number of countries and will
invest in securities of the governments of, and companies based in, at least
three, and normally considerably more, such countries. The percentage of the
Portfolio's assets invested in the debt securities of the government of, or a
company based in, a particular country or denominated in a particular currency
will vary depending on the relative yields of such securities, the economies
of the countries in which the investments are made and such countries' finan-
cial markets, the interest rate climate of such countries and the relationship
of such countries' currencies to the U.S. Dollar. Currency is judged on the
basis of fundamental economic criteria (e.g., relative inflation levels and
trends, growth rate forecasts, balance of payments status, and economic poli-
cies) as well as technical and political data. Under normal market conditions,
it is expected that approximately 25% of the Portfolio's net assets will be
invested in debt securities denominated in the U.S. Dollar.
On December 31, 1996, 3% of the Portfolio's net assets were invested in debt
securities of Japanese issuers. See "Other Investment Policies and Tech-
niques -- Foreign Securities," "-- Investment in Japanese Issuers" and (for a
further description of Japan) Appendix E, to the Statement of Additional In-
formation.
The Portfolio seeks to minimize investment risk by limiting its portfolio in-
vestments to high-quality debt securities of U.S. or foreign governments or
supranational organizations, high-quality U.S. or foreign corporate debt secu-
rities, including commercial paper and high-quality debt obligations of banks
and bank holding companies. The Portfolio's investments consist only of debt
securities rated within one of the two highest grades assigned by S&P or
Moody's or, if
28
<PAGE>
unrated, judged by the Adviser and Sub-Adviser to be of comparable quality. See
"Other Investment Policies and Techniques -- Securities Ratings" and Appendix
A. Pending investment, to maintain liquidity or for temporary defensive purpos-
es, the Portfolio may commit all or any portion of its assets to cash or money
market instruments of U.S. or foreign issuers. The Portfolio also may engage in
certain hedging strategies, including the purchase and sale of forward foreign
currency exchange contracts and other hedging techniques. For a discussion of
these investment policies of the Portfolio, see "Other Investment Policies and
Techniques -- Hedging Techniques," below.
The Portfolio may invest in debt securities issued by supranational organiza-
tions such as: the International Bank for Reconstruction and Development (com-
monly referred to as the "World Bank"), which was chartered to finance develop-
ment projects in developing member countries; the European Union, which is a
fifteen-nation organization engaged in cooperative economic activities; the Eu-
ropean Coal and Steel Community, which is an economic cooperative whose members
are various European nations' steel and coal industries; and the Asian Develop-
ment Bank, which is an international development bank established to lend port-
folios, promote investment and provide technical assistance to member nations
in the Asian and Pacific regions.
The Portfolio may invest in debt securities denominated in the European Cur-
rency Unit ("ECU"), which is a "basket" consisting of specified amounts of the
currencies of certain of the member states of the European Union. The specific
amounts of currencies comprising the ECU may be adjusted by the Council of Min-
isters of the European Union to reflect changes in relative values of the un-
derlying currencies. The Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European governments and supranationals, in particular, issue
ECU-denominated obligations.
For a description of certain risks associated with investing in foreign securi-
ties, see "Other Investment Policies and Techniques -- Foreign Securities," be-
low.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
The North American Government Income Portfolio's investment objective is to
seek the highest level of current income, consistent with what the Adviser con-
siders to be prudent investment risk, that is available from a portfolio of
debt securities issued or guaranteed by the governments of the United States,
Canada, Mexico and Argentina, their political subdivisions (including Canadian
Provinces but excluding States of the United States), agencies, instrumentali-
ties or authorities ("Government Securities"). The Portfolio seeks high current
yields by investing in Government Securities denominated in the U.S. Dollar,
the Canadian Dollar and the Mexican Peso. Normally, the Portfolio expects to
maintain at least 25% of its assets in securities denominated in the U.S. Dol-
lar. In addition, the Portfolio may invest up to 25% of its total assets in
debt securities issued by governmental entities of Argentina ("Argentine Gov-
ernment securities"). The Portfolio expects that it will not retain a debt se-
curity which is
29
<PAGE>
down-graded below BBB or Baa, or, if unrated, determined by the Adviser to
have undergone similar credit quality deterioration, subsequent to purchase by
the Portfolio. There may be circumstances, however, such as the downgrading to
below investment grade of all of the securities of a governmental issuer in
one of the countries in which the Portfolio has substantial investments, under
which the Portfolio, after considering all the circumstances, would conclude
that it is in the best interests of the shareholders to retain its holdings in
securities of that issuer. The average weighted maturity of the Portfolio's
portfolio of fixed-income securities is expected to vary between one year or
less and 30 years. See "Other Investment Policies and Techniques -- Fixed-In-
come Securities." The Portfolio will utilize certain other investment tech-
niques, including options and futures.
The Adviser believes that the increasingly integrated economic relationship
among the United States, Canada and Mexico, characterized by the reduction and
projected elimination of most barriers to free trade among the three nations
and the growing coordination of their fiscal and monetary policies, will bene-
fit the economic performance of all three countries and promote greater corre-
lation of currency fluctuation among the U.S. and Canadian Dollars and the
Mexican Peso. See, however, "General Information About the United Mexican
States" and the Fund's Statement of Additional Information with respect to the
current economic crisis and Peso devaluation in Mexico.
The Portfolio may invest its assets in Government Securities considered in-
vestment grade or higher (i.e., securities rated at least BBB by S&P or at
least Baa by Moody's or, if not so rated, of equivalent investment quality as
determined by the Portfolio's Adviser). See "Other Investment Policies and
Techniques -- Securities Ratings," "-- Investments in Fixed-Income Securities
Rated Baa and BBB" and Appendix A.
The Portfolio's Adviser will actively manage the Portfolio's assets in rela-
tion to market conditions and general economic conditions in the United
States, Canada and Mexico and elsewhere, and will adjust the Portfolio's in-
vestments in Government Securities based on its perception of which Government
Securities will best enable the Portfolio to achieve its investment objective.
In this regard, subject to the limitations described above, the percentage of
assets invested in a particular country or denominated in a particular cur-
rency will vary the Portfolio's Adviser's assessment of the relative yield and
appreciation potential of such securities and the relationship of the
country's currency to the U.S. Dollar.
The Portfolio will invest at least, and normally substantially more than, 65%
of its total assets in Government Securities. To the extent that its assets
are not invested in Government Securities, however, the Portfolio may invest
the balance of its total assets in debt securities issued by the governments
of countries located in Central and South America or any of their political
subdivisions, agencies, instrumentalities or authorities, provided that such
securities are denominated in their local currencies and are rated investment
grade or, if not so rated, are of equivalent investment quality as determined
by the Portfolio's Adviser. The Portfolio will not invest more than 10% of its
total assets in debt securities issued by the governmental entities of any one
such country, pro-
30
<PAGE>
vided, however, that the Portfolio may invest up to 25% of its total assets in
Argentine Government Securities. Under normal market conditions, the Portfolio
will invest at least 65% of its total assets in income-producing securities.
U.S. Government Securities. Securities issued or guaranteed by the United
States Government, its agencies or instrumentalities include: (i) U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturities of one to 10 years), and U.S. Treasury bonds (generally matu-
rities of greater than 10 years), all of which are backed by the full faith and
credit of the United States, and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, including government guaranteed mort-
gage-related securities, some of which are backed by the full faith and credit
of the U.S. Treasury, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"); some of which are supported by the
right of the issuer to borrow from the U.S. Government, e.g., obligations of
Federal Home Loan Banks; and some of which are backed only by the credit of the
issuer itself, e.g., obligations of the Student Loan Marketing Association. See
the Statement of Additional Information for a description of obligations issued
or guaranteed by U.S. Government agencies or instrumentalities.
U.S. Government Securities in which the Portfolio may invest also include "zero
coupon" Treasury securities, which are U.S. Treasury bills that are issued
without interest coupons, U.S. Treasury notes and bonds which have been
stripped of their unma-tured interest coupons, and receipts or certificates
representing interests in such stripped debt obligations and coupons. A zero
coupon security is a debt obligation that does not entitle the holder to any
periodic payments prior to maturity but; instead, is issued and traded at a
discount from its face amount. The discount varies depending on the time re-
maining until maturity, prevailing interest rates, liquidity of the security
and perceived credit quality of the issuer. The market prices of zero coupon
securities are generally more volatile than those of interest-bearing securi-
ties, and are likely to respond to changes in interest rates to a greater de-
gree than otherwise comparable securities that do pay periodic interest. Cur-
rent federal tax law requires that a holder (such as the Portfolio) of a zero
coupon security accrue a portion of the discount at which the security was pur-
chased as income each year, even though the holder receives no interest payment
on the security during the year. As a result, in order to make the distribu-
tions necessary for the Portfolio not to be subject to federal income or excise
taxes, the Portfolio might be required to pay out as an income distribution
each year an amount, obtained by liquidation of portfolio securities if neces-
sary, greater than the total amount of cash that the Portfolio has actually re-
ceived as interest during the year. The Adviser believes, however, that it is
highly unlikely that it would be necessary to liquidate any portfolio securi-
ties for this purpose.
Currently the only U.S. Treasury security issued without coupons is the Trea-
sury bill. Although the U.S. Treasury does not itself issue Treasury notes and
bonds without coupons, under the U.S. Treasury STRIPS pro-
31
<PAGE>
gram interest and principal payments on certain long term treasury securities
may be maintained separately in the Federal Reserve book entry system and may
be separately traded and owned. In addition, in the last few years a number of
banks and brokerage firms have separated ("stripped") the principal portions
("corpus") from the coupon portions of the U.S. Treasury bonds and notes and
sold them separately in the form of receipts or certificates representing undi-
vided interests in these instruments (which instruments are generally held by a
bank in a custodial or trust account). The staff of the Commission has indi-
cated that, in its view, these receipts or certificates should be considered as
securities issued by the bank or brokerage firm involved and, therefore, should
not be included in the Portfolio's categorization of U.S. Government Securi-
ties. The Portfolio disagrees with the staff's interpretation but has under-
taken that it will not invest in such securities until final resolution of the
issue. If such securities are deemed to be U.S. Government Securities the Port-
folio will not be subject to any limitations on their purchase.
U.S. Government Securities do not generally involve the credit risks associated
with other types of interest bearing securities, although, as a result, the
yields available from U.S. Government Securities are generally lower than the
yields available from other interest bearing securities. Like other fixed-
income securities, however, the values of U.S. Government Securities change as
interest rates fluctuate.
Canadian Government Securities. Canadian Government Securities include the
sovereign debt of Canada or any of its Provinces (Alberta, British Columbia,
Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Is-
land, Quebec and Saskatchewan). Canadian Government Securities in which the
Portfolio may invest include Government of Canada bonds and Government of Can-
ada Treasury bills. The Bank of Canada, acting on behalf of the federal govern-
ment, is responsible for the distribution of these bonds and Treasury bills.
The Bank of Canada offers new issues, as approved by the Government, to spe-
cific investment dealers and banks. Government of Canada Treasury bills are
debt obligations with maturities of less than one year. A new issue of Govern-
ment of Canada bonds frequently consists of several different bonds with vari-
ous maturity dates representing different segments of the yield curve with ma-
turities ranging from one to 25 years. The Bank of Canada usually purchases a
pre-determined amount of each issue.
All Canadian Provinces have outstanding bond issues and several Provinces also
guarantee bond issues of Provincial authorities, agents and Crown corporations.
Each new issue yield is based upon a spread from an outstanding Government of
Canada issue of comparable term and coupon. Spreads in the marketplace are de-
termined by various factors, including the relative supply and the rating as-
signed by the rating agencies.
Many Canadian municipalities, municipal financial authorities and Crown corpo-
rations raise funds through the bond market in order to finance capital
expenditures. Unlike U.S. municipal securities, which have special tax status,
Canadian municipal securities have the same tax status as other Canadian Gov-
ernment Securities and trade similarly to such securities.
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The Canadian municipal market may be less liquid than the Provincial bond
market.
Canadian Government Securities in which the Fund may invest include a modified
pass-through vehicle issued pursuant to the program (the "NHA MBS Program") es-
tablished under the National Housing Act of Canada ("NHA"). Certificates issued
pursuant to the NHA MBS Program ("NHA Mortgage-Related Securities") benefit
from the guarantee of the Canada Mortgage and Housing Corporation ("CMHC", a
federal Crown corporation that is (except for certain limited purposes) an
agency of the Government of Canada whose guarantee (similar to that of GNMA in
the United States) is an unconditional obligation of the Government of Canada
in most circumstances.
Mexican Government Securities. The Portfolio may invest in Mexican Government
Securities of investment grade quality. As of the date of this Prospectus,
there are five Mexican Government Securities denominated in the Mexican Peso
that have been rated investment grade by either S&P or Moody's. These five Mex-
ican Government Securities are Cetes and Tesobonos, each rated A-2 by S&P, and
Ajustabonos, Bondes and Udibonos, each rated BBB+/stable by S&P. The Portfo-
lio's Adviser, however, believes that there are other Peso-denominated Mexican
Government Securities that are of investment grade quality. Currently Floating
Rate Notes, rated BB+/stable by S&P, is the only Mexican Government Security
denominated in U.S. Dollars that is rated investment grade by S&P. If qualified
investments of this nature appear in the future, the Portfolio will consider
them for investment.
Mexican Government Securities denominated and payable in the Mexican Peso
include: (i) Cetes, which are book-entry securities sold directly by the Mexi-
can government on a discount basis and with maturities that range from seven to
364 days; (ii) Bondes, which are long-term development bonds issued directly by
the Mexican government with a minimum term of 364 days; and (iii) Ajustabonos,
which are adjustable bonds with a minimum three-year term issued directly by
the Mexican government with the face amount adjusted each quarter by the quar-
terly inflation rate as of the end of the preceding month.
Argentine Government Securities. The Portfolio may invest up to 25% of its to-
tal assets in Argentine Government Securities that are denominated and payable
in the Argentine Peso. Argentine Government Securities include: (i) Bono de In-
version y Crecimiento ("BIC"), which are investment and growth bonds issued di-
rectly by the Argentine government with maturities of ten years; (ii) Bono de
Consolidacion Economica ("BOCON"), which are economic consolidation bonds is-
sued directly by the Argentine government with maturities of ten years and
(iii) Bono de Credito a la Exportacion ("BOCREX"), which are export credit
bonds issued directly by the Argentine government with maturities of four
years. To date, Argentine Government Securities are not rated by either S&P or
Moody's. The Adviser, however, believes that there are Argentine Government Se-
curities that are of investment grade quality.
General Information About Canada. Canada consists of a federation of ten Prov-
inces and two federal territories (which generally fall under federal authori-
ty) with a constitu-
33
<PAGE>
tional division of powers between the federal and Provincial governments. The
Parliament of Canada has jurisdiction over all areas not assigned exclusively
to the Provincial legislatures, and has jurisdiction over such matters as the
federal public debt and property, the regulation of trade and commerce, cur-
rency and coinage, banks and banking, national defense, the postal services,
navigation and shipping and unemployment insurance.
The Canadian economy is based on the free enterprise system with business or-
ganizations ranging from small owner-operated businesses to large multina-
tional corporations. Manufacturing and resource industries are large contribu-
tors to the country's economic output, but as in many other highly developed
countries, there has been a gradual shift from a largely goods-producing econ-
omy to a predominantly service-based one. Agriculture and other primary pro-
duction play a small but key role in the economy. Canada is also an exporter
of energy to the United States in the form of natural gas (of which Canada has
substantial reserves) and hydroelectric power, and has significant mineral re-
sources.
Canadian Dollars are fully exchangeable into U.S. Dollars without foreign ex-
change controls or other legal restriction. Since the major developed country
currencies were permitted to float freely against one another, the range of
fluctuation in the U.S. Dollar/Canadian Dollar exchange rate has been narrower
than the range of fluctuation between the U.S. Dollar and most other major
currencies. Canadian Dollars are fully exchangeable into U.S. Dollars without
foreign exchange controls or other legal restriction. Since the major devel-
oped-country currencies were permitted to float freely against one another,
the range of fluctuation in the U.S. Dollar/Canadian Dollar exchange rate gen-
erally has been narrower than the range of fluctuation between the U.S. Dollar
and most other major currencies. Between 1991 and 1995, Canada experienced a
weakening of its currency. In January 1995, the Canadian Dollar fell to a
nine-year low against the U.S. Dollar, decreasing in value compared to the
U.S. Dollar by approximately 20% from October 1991. During 1995 and 1996, how-
ever, the Canadian Dollar remained steady in value against the U.S. Dollar at
a level of approximately 4% above that low. The range of fluctuation that oc-
curred in the past is not necessarily indicative of the range of fluctuation
that will occur in the future. Future rates of exchange cannot be accurately
predicted.
General Information About The United Mexican States. The United Mexican States
("Mexico") is a nation formed by 31 states and a Federal District (Mexico
City). The Political Constitution of Mexico, which took effect on May 1, 1917,
established Mexico as a Federal Republic and provides for the separation of
executive, legislative and judicial branches. The President and the members of
the General Congress are elected by popular vote.
While in recent years the Mexican economy has experienced improvement in a
number of areas, including seven consecutive years (1987-1994) of growth in
gross domestic product and a substantial reduction in the rate of inflation
and in public sector financial deficit, beginning in 1994, Mexico has experi-
enced an economic crisis that led to the devaluation of the Peso in December
1994. Much of the past improvement in the Mexi-
34
<PAGE>
can economy has been attributable to a series of economic policy initiatives
initiated by the Mexican government over the past decade, which seek to modern-
ize and reform the Mexican economy, control inflation, reduce the financial
deficit, increase public revenues through the reform of the tax system, estab-
lish a competitive and stable currency exchange rate, liberalize trade restric-
tions and increase investment and productivity, while reducing the government's
role in the economy. In this regard, the Mexican government has been proceeding
with a program for privatizing certain state owned enterprises, developing and
modernizing the securities markets, increasing investment in the private sector
and permitting increased levels of foreign investment. The adoption effective
January 1, 1994 by Canada, the United States and Mexico of the North American
Free Trade Agreement could also contribute to the growth of the Mexican econo-
my.
In 1994 Mexico faced internal and external conditions that resulted in an eco-
nomic crisis that continues to affect the Mexican economy adversely. Growing
trade and current account deficits, which could no longer be financed by
inflows of foreign capital, were factors contributing to the crisis. A weaken-
ing economy and unsettling political and social developments caused investors
to lose confidence in the Mexican economy. This resulted in a large decline in
foreign reserves followed by a sharp and rapid devaluation of the Mexican Peso.
The ensuing economic and financial crisis resulted in higher inflation and do-
mestic interest rates, a contraction in real gross domestic product and a li-
quidity crisis.
In response to the adverse economic conditions that developed at the end of
1994, the Mexican government instituted a new economic program; and a new so-
cial accord among the government, business and labor sectors of the country was
entered into in an effort to stabilize the economy and the financial markets.
To help relieve Mexico's economy, the Mexican government also obtained finan-
cial assistance from the United States, other countries and certain interna-
tional agencies conditioned upon the implementation and continuation of the
economic reform program.
While the Mexican economy has stabilized, and is emerging from a recession, it
continues to suffer from high inflation and high interest rates. Its gross do-
mestic product grew in the second quarter of 1996 after declining for five con-
secutive quarters. The Mexican government has projected a 3.7% increase in the
gross domestic product for 1996 from 1995 and a 4% increase for 1997 from 1996.
In October 1995, and again in October 1996, the Mexican government announced
new accords designed to encourage economic growth and reduce inflation. It can-
not be accurately predicted whether these accords will achieve their objec-
tives. Mexico's economy may also be influenced by international economic condi-
tions, particularly those in the United States, and by world prices for oil and
other commodities. The recovery of the economy will require continued economic
and fiscal discipline as well as stable political and social conditions. There
is no assurance that Mexico's economic policy initiatives will be successful or
that succeeding administrations will continue these initiatives.
In August 1976, the Mexican government established a policy of allowing the
Mexican Peso to float against the U.S. Dollar and other currencies. Under this
policy, the
35
<PAGE>
value of the Mexican Peso consistently declined against the U.S. Dollar. Under
economic policy initiatives implemented since December 1987, the Mexican gov-
ernment introduced a series of schedules allowing for the gradual devaluation
of the Mexican Peso against the U.S. Dollar. These gradual devaluations con-
tinued until December 1994. On December 20, 1994, the Mexican government an-
nounced a new policy that would allow a more substantial yet still controlled
devaluation of the Mexican Peso. On December 22, 1994 the Mexican government
announced that it would not continue with the policy announced two days ear-
lier and would instead permit the Peso to float against other currencies, re-
sulting in a continued decline against the U.S. Dollar. From December 22, 1994
through February 15, 1996, the Mexican Peso decreased in value compared to the
U.S. Dollar by approximately 40%. In 1996, the average annual Peso-Dollar ex-
change rate decreased approximately 15% from that in 1995, which itself had
decreased approximately 47% from that in 1994.
Mexico has in the past imposed strict foreign exchange controls. There is no
assurance that future regulatory actions in Mexico would not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
General Information About the Republic of Argentina. The Republic of Argentina
("Argentina") consists of 23 provinces and the federal capital of Buenos
Aires. Its federal constitution provides for an executive branch headed by a
President, a legislative branch and a judicial branch. Each province has its
own constitution, and elects its own governor, legislators and judges, without
the intervention of the federal government.
The military has intervened in the political process on several occasions
since the 1930's and has ruled the country for 22 of the past 65 years. The
most recent military government ruled the country from 1976 to 1983. Four un-
successful military uprisings have occurred since 1983, the most recent in De-
cember 1990.
Shortly after taking office in 1989, the country's current President adopted
market-oriented and reformist policies, including a large privatization pro-
gram, a reduction in the size of the public sector and an opening of the econ-
omy to international competition.
In the decade prior to the current announcement of a new economic plan in
March 1991, the Argentine economy was characterized by low and erratic growth,
declining investment rates and rapidly worsening inflation. Despite its
strengths, which include a well-balanced natural resource base and a high lit-
eracy rate, the Argentine economy failed to respond to a series of economic
plans in the 1980's. The 1991 economic plan represented a pronounced departure
from its predecessors in calling for raising revenues, cutting expenditures
and reducing the public deficit. The extensive privatization program commenced
in 1989 was accelerated, the domestic economy deregulated and opened up to
foreign trade and the frame-work for foreign investment reformed. As a result
of the economic stabilization reforms, gross domestic product increased for
four consecutive years before declining in 1995. By the second quarter of
36
<PAGE>
1996, however, gross domestic product had increased 4.8% from the second quar-
ter of 1995 and preliminary data for the third quarter of 1996 indicate a 6.6%
increase from the third quarter of 1995. The rate of inflation is generally
viewed to be under control.
Significant progress was also made between 1991 and 1994 in rescheduling Ar-
gentina's debt with both external and domestic creditors, which improved fis-
cal cash flows in the medium terms and allowed a return to voluntary credit
markets. Further reforms are currently being implemented in order to sustain
and continue the progress to date. There is no assurance that Argentina's eco-
nomic policy initiatives will be successful or that succeeding administrations
will continue these initiatives.
In 1995 economic policy was directed toward the effects of the Mexican cur-
rency crisis. The Mexican currency crisis led to a run on bank deposits, which
was brought under control by a series of measures designed to strengthen the
financial system. The measures included the "dollarization" of banking re-
serves, the establishment of two trust funds, and the implementation of lim-
ited deposit insurance.
In 1991 the Argentine government enacted currency reforms, which required the
domestic currency to be fully backed by foreign exchange reserves, in an ef-
fort to make the Argentine Peso fully convertible into the U.S. Dollar at a
rate of one to one.
The Argentine Peso has been the Argentine currency since January 1, 1992.
Since that date, the rate of exchange from the Argentine Peso to the U.S. Dol-
lar has remained approximately one to one. The fixed exchange rate has been
instrumental in stabilizing the economy, but has not reduced pressures from a
slow-growth economy and record unemployment. It is not clear that the govern-
ment will be able to resist pressure to devalue the currency. However, the
historic range is not necessarily indicative of fluctuations that may occur in
the exchange rate over time and future rates of exchange cannot be accurately
predicted. The Argentine foreign exchange market was highly controlled until
December 1989, when a free exchange rate was established for all foreign cur-
rency transactions. Argentina has eliminated restrictions on foreign direct
investment and capital repatriation. On September 8, 1993, legislation was
adopted abolishing previous requirements of a three-year waiting period for
capital repatriation. Under the new legislation, foreign investors will be
permitted to remit profits at any time.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The North American Government Income Portfolio may utilize various investment
strategies to hedge its investment portfolio against currency and other risks.
The Portfolio may write covered put and call options and purchase put and call
options on U.S. and foreign securities exchanges and over-the-counter, enter
into contracts for the purchase and sale for future delivery of fixed income
securities or foreign currencies or contracts based on financial indices or
common stocks and purchase and write put and call options on such futures con-
tracts or on foreign currencies and purchase or sell forward foreign currency
exchange contracts. In furtherance of its investment policies, the Portfolio
may enter into interest rate swaps
37
<PAGE>
and may purchase or sell interest rate caps and floors and may purchase and
sell options on fixed income securities. The Portfolio may also enter into for-
ward commitments for the purchase or sale of securities, enter into repurchase
agreements, standby commitments and make secured loans of its portfolio securi-
ties. See "Other Investment Policies and Techniques."
Risks of Investments in Foreign Securities. Investing in securities issued by
foreign governments involves considerations and possible risks not typically
associated with investing in U.S. Government Securities. For a description of
certain risks associated with investing in foreign securities, see "Other In-
vestment Policies and Techniques -- Foreign Securities," below.
The Portfolio believes that, except for currency fluctuations between the U.S.
Dollar and the Canadian Dollar, the risks of investment in foreign securities
are not likely to have a material adverse effect on the Portfolio's investments
in the securities of Canadian issuers or investments denominated in Canadian
Dollars. The risks of investment in foreign securities described in "Other
Investment Policies and Techniques --Foreign Securities," below are more likely
to have a material adverse effect on the Portfolio's investments in the securi-
ties of Mexican and other non-Canadian Foreign issuers, including investments
in securities denominated in Mexican Pesos or other non-Canadian Foreign cur-
rencies. If not hedged, however, currency fluctuations could affect the
unrealized appreciation and depreciation of non-Canadian Government Securities
as expressed in U.S. dollars.
Currency Risks. Because Portfolio assets will be invested in fixed income secu-
rities denominated in the Canadian Dollar, the Mexican Peso and other foreign
currencies and because a substantial portion of the Portfolio's revenues will
be received in currencies other than the U.S. Dollar, the U.S. Dollar equiva-
lent of the Portfolio's net assets and distributions will be adversely affected
by reductions in the value of certain foreign currencies relative to the U.S.
Dollar. These changes will also affect the Portfolio's income. If the value of
the foreign currencies in which the Portfolio receives income falls relative to
the U.S. Dollar between receipt of the income and the making of Portfolio dis-
tributions, the Portfolio may be required to liquidate securities in order to
make distributions if the Portfolio has insufficient cash in U.S. Dollars to
meet the distribution requirements that the Portfolio must satisfy to qualify
as a regulated investment company for federal income tax purposes. Similarly,
if an exchange rate declines between the time the Portfolio incurs expenses in
U.S. Dollars and the time cash expenses are paid, the amount of the currency
required to be converted into U.S. Dollars in order to pay expenses in U.S.
Dollars could be greater than the equivalent amount of such expenses in the
currency at the time they were incurred. In light of these risks, the Portfolio
may engage in certain currency hedging transactions, which themselves involve
certain special risks. See "Other Investment Policies and Techniques -- Hedging
Techniques."
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
The Global Dollar Government Portfolio's primary investment objective is to
seek a high level of current income. Its secondary
38
<PAGE>
investment objective is capital appreciation. In seeking to achieve these
objectives, the Portfolio will invest at least 65% of its total assets in
fixed income securities issued or guaranteed by foreign governments, including
participations in loans between foreign governments and financial
institutions, and interests in entities organized and operated for the purpose
of restructuring the investment characteristics of instruments issued or guar-
anteed by foreign governments ("Sovereign Debt Obligations"). The Portfolio's
investments in Sovereign Debt Obligations will emphasize obligations of a type
customarily referred to as "Brady Bonds," that are issued as part of debt
restructurings and that are collateralized in full as to principal due at ma-
turity by zero coupon obligations issued by the U.S. government, its agencies
or instrumentalities ("Collateralized Brady Bonds"). The Portfolio may also
invest up to 35% of its total assets in U.S. and non-U.S. corporate fixed in-
come securities. The Portfolio will limit its investments in Sovereign Debt
Obligations and U.S. and non-U.S. corporate fixed income securities to U.S.
dollar denominated securities. The Adviser expects that, based upon current
market conditions, the Fund's portfolio of U.S. fixed-income securities will
have an average maturity range of approximately nine to 15 years and the
Fund's portfolio of non-U.S. fixed-income securities will have an average ma-
turity range of approximately 15 to 25 years. The Adviser anticipates that the
Fund's portfolio of sovereign debt obligations will have a longer average ma-
turity.
With respect to its investments in Sovereign Debt Obligations and non-U.S.
corporate fixed income securities, the Fund will emphasize investments in
countries that are considered emerging market countries at the time of pur-
chase. As used in this Prospectus, an "emerging market country" is any country
that is considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (commonly referred to as
the "World Bank"). The Portfolio anticipates that a substantial part of its
initial investment focus will be in the U.S. dollar denominated securities or
obligations of Argentina, Brazil, Mexico, Morocco, the Philippines and Venezu-
ela because these countries are now, or are expected by the Adviser at a fu-
ture date to be, the principal participants in debt restructuring programs
(including, in the case of Argentina, Mexico, the Philippines and Venezuela,
issuers of currently outstanding Brady Bonds) that, in the Adviser's opinion,
will provide the most attractive investment opportunities for the Portfolio.
See Appendix E to the Fund's Statement of Additional Information for informa-
tion about those six countries. The Adviser anticipates that other countries
that will provide initial investment opportunities for the Portfolio include,
among others, Bolivia, Costa Rica, the Dominican Republic, Ecuador, Nigeria,
Panama, Peru, Poland, Thailand, Turkey and Uruguay. See "Brady Bonds" below.
The Portfolio may invest up to 30% of its total assets in the Sovereign Debt
Obligations and corporate fixed income securities of issuers in any one of Ar-
gentina, Brazil, Mexico, Morocco, the Philippines or Venezuela, and the Port-
folio will limit investments in the Sovereign Debt Obligations of each such
country (or of any other single foreign country) to less than 25% of its total
assets. The Portfolio expects that it will not
39
<PAGE>
invest more than 10% of its total assets in the Sovereign Debt Obligations and
corporate fixed income securities of issuers in any other single foreign coun-
try. At present, each of the above-named countries is an "emerging market coun-
try."
In selecting and allocating assets among countries, the Adviser will develop a
long-term view of those countries and will analyze sovereign risk by focusing
on factors such as a country's public finances, monetary policy, external ac-
counts, financial markets, stability of exchange rate policy and labor condi-
tions. In selecting and allocating assets among corporate issues within a given
country, the Adviser will consider the relative financial strength of issues
and expects to emphasize investments in securities of issuers that, in the Ad-
viser's opinion, are undervalued within each market sector. The Portfolio is
not required to invest any specified minimum amount of its total assets in the
securities or obligations of issues located in any particular country.
Sovereign Debt Obligations held by the Portfolio will take the form of bonds,
notes, bills, debentures, warrants, short-term paper, loan participations, loan
assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of other Sovereign Debt
Obligations. Sovereign Debt Obligations held by the Portfolio generally will
not be traded on a securities exchange. The U.S. and non-U.S. corporate fixed
income securities held by the Portfolio will include debt securities, convert-
ible securities and preferred stocks of corporate issuers. The Portfolio will
not be subject to restrictions on the maturities of the securities it holds.
The Adviser expects that, based upon current market conditions, the Portfolio's
investment portfolio of U.S. fixed-income securities will have an average matu-
rity range of approximately 9 to 15 years and the Portfolio's portfolio of non-
U.S. fixed income securities will have an average maturity range of approxi-
mately 15 to 25 years. The Adviser anticipates that the Portfolio's portfolio
of Sovereign Debt Obligations will have a longer average maturity.
Substantially all of the Portfolio's assets will be invested in high yield,
high risk debt securities that are lower-rated (i.e., below investment grade),
or of comparable quality and unrated, and that are considered to be predomi-
nantly speculative as regards the issuer's capacity to pay interest and repay
principal. See "Other Investment Policies and Techniques -- Securities Rat-
ings," "-- Investment in Lower-Rated Fixed-Income Securities" and "Appendix A."
A substantial portion of the Portfolio's investments will be in (i) securities
which were initially issued at discounts from their face values ("Discount Ob-
ligations") and (ii) securities purchased by the Portfolio at a price less than
their stated face amount or, in the case of Discount Obligations, at a price
less than their issue price plus the portion of "original issue discount" pre-
viously accrued thereon, i.e., purchased at a "market discount." Under current
federal tax law and in furtherance of its primary investment objective of seek-
ing high current income, the Portfolio will accrue as current income each year
a portion of the original issue and/or market discount at which each such obli-
gation is purchased by the Portfolio even though the Portfolio does not receive
during the year cash interest payments-
40
<PAGE>
on the obligation corresponding to the accrued discount. Under the minimum
distribution requirements of the Code, the Portfolio may be required to pay
out as an income distribution each year an amount significantly greater than
the total amount of cash interest the Portfolio has actually received as in-
terest during the year. Such distributions will be made from the cash assets
of the Portfolio, from borrowings or by liquidation of portfolio securities,
if necessary. The risks associated with holding illiquid may be accentuated at
such times. The Portfolio believes, however, that it is highly unlikely that
it would be necessary to liquidate portfolio securities in order to make such
required distributions or to meet its primary investment objective of high
current income. See "Illiquid Securities."
Brady Bonds. As noted above, a significant portion of the Portfolio's invest-
ment portfolio will consist of debt obligations customarily referred to as
"Brady Bonds," which are created through the exchange of existing commercial
bank loans to foreign entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary of the Trea-
sury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued only
recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are dollar-denominated) and they are actively traded in the over-the-
counter secondary market.
Dollar-denominated, Collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling inter-
est payments based on the applicable interest rate at that time and is ad-
justed at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateral-
ized interest payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to Collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero cou-
pon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the sched-
uled maturity of the defaulted Brady Bonds, which will continue to be out-
standing at which time the face amount of the collateral will equal the prin-
cipal payments which would have then been due on the Brady Bonds in the normal
course. In addition, in light of the residual risk of Brady Bonds and, among
other factors, the history of defaults with respect to commercial bank loans
by public and private entities of countries issuing Brady Bonds, investments
in Brady Bonds are to be viewed as speculative.
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<PAGE>
Structured Securities. The Portfolio may invest up to 25% of its total assets
in interests in entities organized and operated solely for the purpose of re-
structuring the investment characteristics of Sovereign Debt Obligations. This
type of restructuring involves the deposit with or purchase by an entity, such
as a corporation or trust, of specified instruments (such as commercial bank
loans or Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type
in which the Portfolio anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the un-
derlying instruments.
The Portfolio is permitted to invest in a class of Structured Securities that
is either subordinated or unsubordinated to the right of payment of another
class. Subordinated Structured Securities typically have higher yields and
present greater risks than unsubordinated Structured Securities.
Certain issuers of Structured Securities may be deemed to be "investment compa-
nies" as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). As a result, the Portfolio's investment in these Structured Securities
may be limited by the restrictions contained in the 1940 Act described below
under "Investment in Other Investment Companies."
Loan Participations and Assignments. The Portfolio may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between an
issuer of Sovereign Debt Obligations and one or more financial institutions
("Lenders"). The Portfolio's investments in Loans are expected in most in-
stances to be in the form of participations in Loans ("Participations") and as-
signments of all or a portion of Loans ("Assignments") from third parties. The
Portfolio may invest up to 25% of its total assets in Participations and As-
signments. The government that is the borrower on the Loan will be considered
by the Portfolio to be the issuer of a Participation or Assignment for purposes
of the Portfolio's fundamental investment policy that it will not invest 25% or
more of its total assets in securities of issuers conducting their principal
business activities in the same industry (i.e., foreign government). The Port-
folio's investment in Participations typically will result in the Portfolio
having a contractual relationship only with the Lender and not with the borrow-
er. The Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is a Lender having total
assets of more than $25 billion and whose senior unsecured debt is rated in-
vestment grade or higher (i.e., Baa or higher by Moody's or BBB or higher by
S&P).
When the Portfolio purchases Assignments from Lenders it will acquire direct
rights
42
<PAGE>
against the borrower on the Loan. Because Assignments are arranged through
private negotiations between potential assignees and potential assignors, how-
ever, the rights and obligations acquired by the Portfolio as the purchaser of
an Assignment may differ from, and be more limited than, those held by the as-
signing Lender. The assignability of certain Sovereign Debt Obligations is re-
stricted by the governing documentation as to the nature of the assignee such
that the only way in which the Portfolio may acquire an interest in a Loan is
through a Participation and not an Assignment. The Portfolio may have diffi-
culty disposing of Assignments and Participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, the Portfolio anticipates that such securities
could be sold only to a limited number of institutional investors. The lack of
a liquid secondary market may have an adverse impact on the value of such se-
curities and the Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet the Portfolio's liquidity needs in re-
sponse to a specific economic event such as a deterioration in the creditwor-
thiness of the borrower. The lack of a liquid secondary market for Assignments
and Participations also may make it more difficult for the Portfolio to assign
a value to these securities for purposes of valuing the Portfolio's portfolio
and calculating its net asset value.
U.S. and Non-U.S. Corporate Fixed Income Securities. U.S and non-U.S. corpo-
rate fixed income securities include debt securities, convertible securities
and preferred stocks of corporate issuers. Differing yields on fixed income
securities of the same maturity are a function of several factors, including
the relative financial strength of the issuers. Higher yields are generally
available from securities in the lower rating categories. When the spread be-
tween the yields of lower rated obligations and those of more highly rated is-
sues is relatively narrow, the Portfolio may invest in the latter since they
may provide attractive returns with somewhat less risk. The Portfolio expects
to invest in investment grade securities (i.e. securities rated Baa or better
by Moody's or BBB or better by S&P) and in high yield, high risk lower rated
securities (i.e., securities rated lower than Baa by Moody's or BBB by S&P and
commonly referred to as "junk bonds") and in unrated securities of comparable
credit quality. Unrated securities will be considered for investment by the
Portfolio when the Adviser believes that the financial condition of the is-
suers of such obligations and the protection afforded by the terms of the
obligations themselves limit the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's invest-
ment objectives and policies. During the Fund's fiscal year ended December 31,
1996, on a weighted average basis, the percentages of the Portfolio's assets
invested in securities rated (or considered by the Adviser to be of equivalent
quality to securities rated) in particular rating categories were 8% in A and
above, 8% in Ba or BB, 4% in B, 1% in CC and 79% in non-rated. See "Certain
Risk Considerations" for a discussion of the risks associated with the Portfo-
lio's investments in U.S. and non-U.S. corporate fixed income securities.
Investment in Other Investment Companies. The Portfolio may invest in other
investment companies whose investment objec-
43
<PAGE>
tives and policies are consistent with those of the Portfolio. In accordance
with the 1940 Act, the Portfolio may invest up to 10% of its total assets in
securities of other investment companies. In addition, under the 1940 Act the
Portfolio may not own more than 3% of the total outstanding voting stock of
any investment company and not more than 5% of the value of the Portfolio's
total assets may be invested in the securities of any investment company. If
the Portfolio acquired shares in investment companies, shareholders would bear
both their proportionate share of expenses in the Portfolio (including manage-
ment and advisory fees) and, indirectly, the expenses of such investment com-
panies (including management and advisory fees).
Warrants. The Portfolio may invest in warrants, which are securities permit-
ting, but not obligating, their holder to subscribe for other securities. The
Portfolio may invest in warrants for debt securities or warrants for equity
securities that are acquired as units with debt instruments. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holder to purchase, and they do not repre-
sent any rights in the assets of the issuer. As a result, an investment in
warrants may be considered more speculative than certain other types of in-
vestments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities, and a warrant ceases to have
value if it is not exercised prior to its expiration date. The Portfolio does
not intend to retain in its portfolio any common stock received upon the exer-
cise of a warrant and will sell the common stock as promptly as practicable
and in a manner that it believes will reduce its risk of a loss in connection
with the sale. The Portfolio does not intend to retain in its portfolio any
warrant for equity securities acquired as a unit with a debt instrument, if
the warrant begins to trade separately from the related debt instrument.
Reverse Repurchase Agreements and Dollar Rolls. The Portfolio may also use re-
verse repurchase agreements and dollar rolls as part of its investment strate-
gy. Reverse repurchase agreements involve sales by the Portfolio of portfolio
assets concurrently with an agreement by the Portfolio to repurchase the same
assets at a later date at a fixed price. Generally, the effect of such a
transaction is that the Portfolio can recover all or most of the cash invested
in the portfolio securities involved during the term of the reverse repurchase
agreement, while it will be able to keep the interest income associated with
those portfolio securities. Such transactions are only advantageous if the in-
terest cost to the Portfolio of the reverse repurchase transaction is less
than the cost of otherwise obtaining the cash.
The Portfolio may enter into dollar rolls in which the Portfolio sells securi-
ties for delivery in the current month and simultaneously contracts to repur-
chase substantially similar (same type and coupon) securities on a specified
future date. During the roll period, the Portfolio forgoes principal and in-
terest paid on the securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned
on the cash proceeds of the initial sale.
44
<PAGE>
The Portfolio will establish a segregated account with its custodian in which
it will maintain cash and/or liquid high grade debt securities equal in value
to its obligations in respect of reverse repurchase agreements and dollar
rolls. Reverse repurchase agreements and dollar rolls involve the risk that
the market value of the securities the Portfolio is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a reverse repurchase agreement or dollar roll files
for bankruptcy or becomes insolvent, the Portfolio's use of the proceeds of
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Portfolio's obligation to re-
purchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques and
are considered borrowings by the Portfolio. Under the requirements of the 1940
Act, the Portfolio is required to maintain an asset coverage of at least 300%
of all borrowings. Reverse repurchase agreements and dollar rolls, together
with any borrowing will not exceed 33% of the Portfolio's total assets, less
liabilities other than any borrowing.
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short sale if more than 10% of the Portfolio's
net assets (taken at market value) is held as collateral for short sales at
any one time. If the price of the security sold short increases between the
time of the short sale and the time the Portfolio replaces the borrowed secu-
rity, the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain. See "Investment Restrictions" in the
Statement of Additional Information. See "Dividends, Distributions and Tax-
es -- Tax Straddles" in the Statement of Additional Information for a discus-
sion of certain special Federal income tax considerations that may apply to
short sales which are entered into by the Fund.
In furtherance of its investment policies, the Portfolio may, without limit,
enter into interest rate swaps and may purchase or sell interest rate caps and
floors and may purchase and sell options on fixed income securities and indi-
ces thereof. The Portfolio may also enter into forward commitments for the
purchase or sale of securities, enter into repurchase agreements, standby com-
mitments and make secured loans of its portfolio securities. See "Other In-
vestment Policies and Techniques."
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objectives and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
45
<PAGE>
Sovereign Debt Obligations. No established secondary markets may exist for
many of the Sovereign Debt Obligations in which the Portfolio will invest. Re-
duced secondary market liquidity may have an adverse effect on the market
price and the Portfolio's ability to dispose of particular instruments when
necessary to meet its liquidity requirements or in response to specific eco-
nomic events such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain Sovereign Debt Obligations may
also make it more difficult for the Portfolio to obtain accurate market quota-
tions for purpose of valuing its portfolio. Market quotations are generally
available on many Sovereign Debt Obligations only from a limited number of
dealers and may not necessarily represent firm bids of those dealers or prices
for actual sales.
By investing in Sovereign Debt Obligations, the Portfolio will be exposed to
the direct or indirect consequences of political, social and economic changes
in various countries. Political changes in a country may affect the willing-
ness of a foreign government to make or provide for timely payments of its ob-
ligations. The country's economic status, as reflected, among other things, in
its inflation rate, the amount of its external debt and its gross domestic
product, will also affect the government's ability to honor its obligations.
The Sovereign Debt Obligations in which the Portfolio will invest in most
cases pertain to countries that are among the world's largest debtors to com-
mercial banks, foreign governments, international financial organizations and
other financial institutions. In recent years, the governments of some of
these countries have encountered difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructur-
ing of certain indebtedness. Restructuring arrangements have included, among
other things, reducing and rescheduling interest and principal payments by ne-
gotiating new or amended credit agreements or converting outstanding principal
and unpaid interest to Brady Bonds, and obtaining new credit to finance inter-
est payments. Certain governments have not been able to make payments of in-
terest on or principal of Sovereign Debt Obligations as those payments have
come due. Obligations arising from past restructuring agreements may affect
the economic performance and political and social stability of those issuers.
The ability of governments to make timely payments on their obligations is
likely to be influenced strongly by the issuer's balance of payments, includ-
ing export performance, and its access to international credits and invest-
ments. To the extent that a country receives payment for its exports in cur-
rencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. To the extent that a country develops a
trade deficit, it will need to depend on continuing loans from foreign govern-
ments, multilateral organizations or private commercial banks, aid payments
from foreign governments and on inflows of foreign investment. The access of a
country to these forms of external funding may not be certain, and a with-
drawal of external funding could adversely affect the capacity of a government
to make payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a
46
<PAGE>
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
The Portfolio is permitted to invest in Sovereign Debt Obligations that are
not current in the payment of interest or principal or are in default, so long
as the Adviser believes it to be consistent with the Portfolio's investment
objectives. The Portfolio may have limited legal recourse in the event of a
default with respect to certain Sovereign Debt Obligations it holds. For exam-
ple, remedies from defaults on certain Sovereign Debt Obligations, unlike
those on private debt, must, in some cases, be pursued in the courts of the
defaulting party itself. Legal recourse therefore may be significantly dimin-
ished. Bankruptcy, moratorium and other similar laws applicable to issuers of
Sovereign Debt Obligations may be substantially different from those applica-
ble to issuers of private debt obligations. The political context, expressed
as the willingness of an issuer of Sovereign Debt Obligations to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of securities issued by foreign gov-
ernments in the event of default under commercial bank loan agreements.
U.S. Corporate Fixed Income Securities. The U.S. corporate fixed income secu-
rities in which the Portfolio will invest may include securities issued in
connection with corporate restructurings such as takeovers or leveraged
buyouts, which may pose particular risks. Securities issued to finance corpo-
rate restructurings may have special credit risks due to the highly leveraged
conditions of the issuer. In addition, such issuers may lose experienced man-
agement as a result of the restructuring. Finally, the market price of such
securities may be more volatile to the extent that expected benefits from the
restructuring do not materialize. The Portfolio may also invest in U.S. corpo-
rate fixed income securities that are not current in the payment of interest
or principal or are in default, so long as the Adviser believes such invest-
ment is consistent with the Portfolio's investment objectives. The Portfolio's
rights with respect to defaults on such securities will be subject to applica-
ble U.S. bankruptcy, moratorium and other similar laws.
UTILITY INCOME PORTFOLIO
The Utility Income Portfolio's investment objective is to seek current income
and capital appreciation by investing primarily in equity and fixed-income se-
curities of companies in the utilities industry. The Portfolio may invest in
securities of both United States and foreign issuers, although no more than
15% of the Portfolio's total assets will be invested in issuers in any one
foreign country. The utilities industry consists of companies engaged in (i)
the manufacture, production, generation, provision, transmission, sale and
distribution of gas and electric energy, and communications equipment and
services, including telephone, telegraph, satellite, microwave and other com-
panies providing communication facilities for the public, or (ii) the provi-
sion of other utility or utility-related goods and services, including, but
not limited to, entities engaged in water provision, cogeneration, waste dis-
posal system provision, solid waste electric generation, independent power
producers
47
<PAGE>
and non-utility generators. As a matter of fundamental policy, the Portfolio
will, under normal circumstances, invest at least 65% of the value of its total
assets in securities of companies in the utilities industry. The Portfolio con-
siders a company to be in the utilities industry if, during the most recent
twelve month period, at least 50% of the company's gross revenues, on a consol-
idated basis, is derived from its utilities activities. At least 65% of the
Portfolio's total assets are to be invested in income-producing securities.
The Portfolio's investment objective and policies are designed to take advan-
tage of the characteristics and historical performance of securities of compa-
nies in the utilities industry. Many of these companies have established a rep-
utation for paying regular dividends and for increasing their common stock div-
idends over time. In evaluating particular issuers, the Adviser will consider a
number of factors, including historical growth rates and rates of return on
capital, financial condition and resources, management skills and such industry
factors as regulatory environment and energy sources. With respect to invest-
ments in equity securities, the Adviser will consider the prospective growth in
earnings and dividends in relation to price/earnings ratios, yield and risk.
The Adviser believes that above-average dividend returns and below-average
price/earnings ratios are factors that not only provide current income but also
generally tend to moderate risk and to afford opportunity for appreciation of
securities owned by the Portfolio.
The Portfolio will invest in equity securities, such as common stocks, securi-
ties convertible into common stocks and rights and warrants to subscribe for
purchase of common stocks, and in fixed-income securities, such as bonds and
preferred stocks. There are no fixed percentage limits on the allocation of the
Portfolio's investments between equity securities and fixed income securities.
Rather, the Portfolio will vary the percentage of assets invested in any one
type of security based upon the Adviser's evaluation as to the appropriate
portfolio structure for achieving the Portfolio's investment objective under
prevailing market, economic and financial conditions. Certain securities (such
as fixed-income securities) will be selected on the basis of their current
yield, while other securities may be purchased for their growth potential. The
values of fixed-income securities change as the general levels of interest
rates fluctuate. When interest rates decline, the values of fixed income secu-
rities can be expected to increase, and when interest rates rise, the values of
fixed income securities can be expected to decrease. The Adviser expects that
the average weighted maturity of the Portfolio's portfolio of fixed-income se-
curities may, depending upon market conditions, vary between 5 and 25 years.
The Portfolio may maintain up to 35% of its net assets in fixed-income securi-
ties rated below Baa by Moody's or below BBB by S&P or Fitch Investors Service,
Inc. ("Fitch") or, if not rated, of comparable investment quality as determined
by the Adviser. Such high-risk, high-yield securities (commonly referred to as
"junk bonds") are considered to have speculative or, in the case of relatively
low ratings, predominantly speculative characteristics. See "Other Investment
Policies and Techniques--Securities Ratings,"
48
<PAGE>
"--Investment in Lower-Rated Fixed-Income Securities" and Appendix A. The Port-
folio will not retain a security which is down-graded below B, or if unrated,
determined by the Adviser to have undergone similar credit quality deteriora-
tion subsequent to purchase.
Convertible Securities. Utilities frequently issue convertible securities. Con-
vertible securities include bonds, debentures, corporate notes and preferred
stocks that are convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general character-
istics as non-convertible debt securities, which provide a stable stream of in-
come with generally higher yields than those of equity securities of the same
or similar issuers. As with all debt securities, the market value of convert-
ible securities tends to decline as interest rates increase and, conversely, to
increase as interest rates decline. While convertible securities generally of-
fer lower interest or dividend yields than non-convertible debt securities of
similar quality, they do enable the investor to benefit from increases in the
market price of the underlying common stock. The Portfolio may invest up to 30%
of its net assets in the convertible securities of companies whose common
stocks are eligible for purchase by the Portfolio under the investment policies
described above.
Rights and Warrants. The Portfolio may invest up to 5% of its net assets in
rights or warrants which entitle the holder to buy equity securities at a spe-
cific price for a specific period of time, but will do so only if the equity
securities themselves are deemed appropriate by the Adviser for inclusion in
the Portfolio's portfolio.
UTILITIES INDUSTRY
United States Utilities. The United States utilities industry has experienced
significant changes in recent years. Electric utility companies in general have
been favorably affected by lower fuel costs, the full or near completion of ma-
jor construction programs and lower financing costs. In addition, many utility
companies have generated cash flows in excess of current operating expenses and
construction expenditures, permitting some degree of diversification into un-
regulated businesses. Some electric utilities have also taken advantage of the
right to sell power outside of their historical territories. At this time,
there are certain institutional impediments to the wide-scale deregulation of
electric utilities, including among other things, limitations on the redistri-
bution of power. The Adviser believes, however, that recent developments, in-
cluding the enactment of the Energy Policy Act of 1992, may alleviate certain
existing restrictions.
Electric utilities that use coal in connection with the production of electric
power are particularly susceptible to environmental regulation, including the
requirements of the federal Clean Air Act and of similar state laws. Such regu-
lation may necessitate large capital expenditures in order for the utility to
achieve compliance. Due to the public, regulatory and governmental concern with
the cost and safety of nuclear power facilities in general, certain electric
utilities with uncompleted nuclear power facilities may have problems complet-
ing and licensing such facilities. Regulatory changes with respect to nuclear
and conventionally fueled generating facilities could increase costs or impair
the ability of such electric
49
<PAGE>
utilities to operate such facilities, thus reducing their ability to service
dividend payments with respect to the securities they issue. Electric utilities
that utilize nuclear power facilities must apply for recommissioning from the
Nuclear Regulatory Commission after 40 years. Failure to obtain recommissioning
could result in an interruption of service or the need to purchase more expen-
sive power from other entities, and could subject the utility to significant
capital construction costs in connection with building new nuclear or
alternative-fuel power facilities, upgrading existing facilities or converting
such facilities to alternative fuels.
Rates of return of utility companies generally are subject to review and limi-
tation by state public utilities commissions and tend to fluctuate with mar-
ginal financing costs. Rate changes, however, ordinarily lag behind the changes
in financing costs, and thus can favorably or unfavorably affect the earnings
or dividend pay-outs on utilities stocks depending upon whether such rates and
costs are declining or rising.
Gas transmission companies, gas distribution companies and telecommunications
companies are also undergoing significant changes. Gas utilities have been ad-
versely affected by declines in the prices of alternative fuels, and have also
been affected by oversupply conditions and competition. Telephone utilities are
still experiencing the affects of the break-up of American Telephone & Tele-
graph Company, including increased competition and rapidly developing technolo-
gies with which traditional telephone companies now compete. Potential sources
of competition and new products are cable television systems, shared tenant
services and other noncarrier systems, which are capable of bypassing tradi-
tional telephone services providers' local plants, either completely or par-
tially, through substitutions of special access for switched access or through
concentration of telecommunications traffic on fewer of the traditional tele-
phone services providers' lines. Although there can be no assurance that in-
creased competition and other structural changes will not adversely affect the
profitability of such utilities, or that other negative factors will not
develop in the future, in the Adviser's opinion, increased competition and
change may provide better positioned utility companies with opportunities for
enhanced profitability.
Less traditional utility companies are emerging as new technologies develop and
as old technologies are refined. Such issuers include entities engaged in
cogeneration, waste disposal system provision, solid waste electric generation,
independent power producers and non-utility generators.
Utility companies historically have been subject to the risks of increases in
fuel and other operating costs, high interest costs on borrowings needed for
capital construction programs, costs associated with compliance with environ-
mental and nuclear safety regulations, service interruption due to environmen-
tal, operational or other mishaps, the effects of economic slowdowns, surplus
capacity, competition and changes in the regulatory climate. In particular,
regulatory changes with respect to nuclear and conventionally fueled generating
facilities could increase costs or impair the ability of utility companies to
operate such facilities, thus reducing utility companies' earnings or resulting
in losses. There can also be no assur-
50
<PAGE>
ance that regulatory policies or accounting standard changes will not nega-
tively affect utility companies' earnings or dividends. Utility companies are
subject to regulation by various authorities and may be affected by the imposi-
tion of special tariffs and changes in tax laws. To the extent that rates are
established or reviewed by governmental authorities, utility companies are sub-
ject to the risk that such authorities will not authorize increased rates. In
addition, because of the Portfolio's policy of concentrating its investments in
securities of utility companies, the Portfolio may be more susceptible than an
investment company without such a policy to any single economic, political or
regulatory occurrence affecting the utilities industry. Under market conditions
that are unfavorable to the utilities industry, the Adviser may significantly
reduce the Portfolio's investment in that industry.
The average common stock yield of utilities historically has exceeded that of
industrial stocks by a wide margin. For example, the stocks in the Standard &
Poor's Utilities index had an average yield of 4.97% for 1996, more than twice
the 1.93% average yield for the stocks in the Standard & Poor's Industrials in-
dex. As the dividends on utility common stocks have increased, average total
returns experienced by investors in utility stocks over the last ten years have
been superior to those provided by industrial stocks when measured by such
widely accepted indexes as Standard & Poor's. There can be no assurance that
the historical investment performance for any industry, including the utilities
industry, is indicative of future performance.
Foreign Utilities. Foreign utility companies, like utility companies located in
the United States, are generally subject to regulation, although such regula-
tions may or may not be comparable to those in the United States. Foreign util-
ity companies in certain countries may be more heavily regulated by their re-
spective governments than utility companies located in the United States and,
as in the United States, generally are required to seek government approval for
rate increases. In addition, because many foreign utility companies use fuels
that cause more pollution that those used in the United States such utilities
may, in the future, be required to invest in pollution control equipment if the
countries in which the utilities are located adopt pollution restrictions that
more closely resemble United States pollution restrictions. Foreign utility
regulatory systems vary from country to country and may evolve in ways differ-
ent from regulation in the United States.
The Portfolio's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility compa-
nies currently are government-owned, thereby limiting current investment oppor-
tunities for the Portfolio, the Adviser believes that, in order to attract sig-
nificant capital for growth, some foreign governments may engage in a program
of privatization of their utilities industry, and that the securities issued by
privatized utility companies may offer attractive investment opportunities with
the potential for long-term growth.
Privatization, which refers to the trend toward investor ownership, rather than
gov-
51
<PAGE>
ernment ownership, of assets is expected to occur both in newer, faster-grow-
ing economies and in mature economies. In addition, efforts toward moderniza-
tion in Eastern Europe, as well as the potential of economic unification of
European markets, in the view of the Adviser, may improve economic growth, re-
duce costs and increase competition in Europe, which could result in opportu-
nities for investment by the Portfolio in utilities industries in Europe.
There can be no assurance that securities of privatized companies will be of-
fered to the public or to foreign companies such as the Portfolio, or that in-
vestment opportunities in foreign markets for the Portfolio will increase for
this or other reasons.
The percentage of the Portfolio's assets invested in issuers of particular
countries will vary depending on the relative yields and growth and income po-
tential of such securities, the economies of the countries in which the in-
vestments are made, interest rate conditions in such countries and the rela-
tionship of such countries' currencies to the U.S. dollar. Currency is judged
on the basis of fundamental economic criteria (e.g., relative inflation levels
and trends, growth rate forecasts, balance of payments status, and economic
policies) as well as technical and political data. As mentioned above, the
Portfolio will not invest more than 15% of its total assets in issuers in any
one foreign country. See "Other Investment Policies and Techniques -- Foreign
Securities."
OTHER SECURITIES
While the Portfolio's investment strategy normally emphasizes securities of
companies in the utilities industry, the Portfolio may, where consistent with
its investment objective, invest up to 35% of its total assets in equity and
fixed-income securities of domestic and foreign issuers other than companies
in the utilities industry, including (i) U.S. Government Securities and repur-
chase agreements pertaining thereto, as discussed below, (ii) foreign securi-
ties, as discussed below, (iii) corporate fixed-income securities of domestic
issuers of quality comparable to the fixed-income securities described above,
(iv) certificates of deposit, bankers' acceptances and interest-bearing sav-
ings deposits of banks having total assets of more than $1 billion and which
are members of the Federal Deposit Insurance Corporation, (v) commercial paper
of prime quality rated Prime 1 or higher by Moody's or A-1 or higher by S&P
or, if not rated, issued by companies which have an outstanding debt issue
rated Aa or higher by Moody's or AA or higher by S&P, (vi) equity securities
of domestic corporate issuers, and (vii) the additional derivative vehicles
discussed below under the caption "Investment Practices."
U.S. Government Securities. U.S. Government Securities include: (i) U.S. Trea-
sury obligations, which differ only in their interest rates, maturities and
times of issuance: U.S. Treasury bills (maturity of one year or less), U.S.
Treasury notes (maturities of one to 10 years), and U.S. Treasury bonds (gen-
erally maturities of greater than 10 years), all of which are backed by the
full faith and credit of the United States; and (ii) obligations issued or
guaranteed by U.S. Government agencies or instrumentalities, including govern-
ment guaranteed mortgage-related securities. Some such obligations are backed
by the full faith and credit of the U.S. Trea-
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<PAGE>
sury, e.g., direct pass-through certificates of the Government National Mort-
gage Association, some are supported by the right of the issuer to borrow from
the U.S. Government, e.g., obligations of Federal Home Loan Banks, and some
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association. See Appendix A to the Statement of Addi-
tional Information for a further description of obligations issued or guaran-
teed by U.S. Government agencies or instrumentalities.
U.S. Government Securities do not generally involve the credit risks associ-
ated with other types of interest bearing securities, although, as a result,
the yields available from U.S. Government Securities are generally lower than
the yields available from other interest bearing securities. Like other fixed-
income securities, however, the values of U.S. Government Securities change as
interest rates fluctuate. When interest rates decline, the values of U.S. Gov-
ernment Securities can be expected to increase and when interest rates rise,
the values of U.S. Government Securities can be expected to decrease.
Foreign Securities. Foreign fixed-income securities in which the Portfolio in-
vests may include fixed-income securities of quality comparable to the fixed-
income securities described above as determined by the Adviser (i) issued or
guaranteed, as to payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies or other governmental entities
(collectively, "Government Entities") and (ii) of foreign corporate issuers,
denominated in foreign currencies or in U.S. Dollars (including fixed-income
securities of a Government Entity or foreign corporate issuer in a country de-
nominated in the currency of another country). The Portfolio may also invest
in equity securities of foreign corporate issuers. See "Investment Objective
and Policies -- Utilities Industry -- Foreign Utilities." For a description of
certain risks associated with investment in foreign securities, see "Other In-
vestment Policies and Techniques -- Foreign Securities," below.
In addition to purchasing corporate securities of foreign issuers in foreign
securities markets, the Portfolio may invest in American Depositary Receipts
(ADRs), Global Depositary Receipts (GDRs) and other types of Depository Re-
ceipts (which, together with ADRs and GDRs, are hereinafter referred to as
"Depositary Receipts"). Depositary Receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be con-
verted. In addition, the issuers of the stock of unsponsored Depositary Re-
ceipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and
the market value of the Depositary Receipts. ADRs are Depositary Receipts typ-
ically issued by a United States bank or trust company which evidence owner-
ship of underlying securities issued by a foreign corporation. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by United States banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a United States corporation. Generally, Depositary Receipts in reg-
istered form are designed for use in the U.S. securities markets and Deposi-
tary Receipts in bearer form are designed for use in foreign
53
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securities markets. For purposes of the Portfolio's investment policies, the
Portfolio's investments in ADRs will be deemed to be investments in securities
issued by United States issuers and the Portfolio's investments in GDRs and
other types of Depositary Receipts will be deemed to be investments in the un-
derlying securities.
The Portfolio will also be authorized to invest in securities of supranational
entities denominated in the currency of any country. A supranational entity is
an entity designated or supported by the national government of one or more
countries to promote economic reconstruction or development. Examples of su-
pranational entities include, among others, the World Bank (International Bank
for Reconstruction and Development) and the European Investment Bank. The gov-
ernmental members, or "stockholders," usually make initial capital contribu-
tions to the supranational entity and in many cases are committed to make ad-
ditional contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. The Portfolio may, in
addition, invest in securities denominated in European Currency Units. A Euro-
pean Currency Unit is a basket of specified amounts of the currencies of the
fifteen member states of the European Union. The Portfolio is further autho-
rized to invest in "semi-governmental securities," which are securities issued
by entities owned by either a national state or equivalent government or are
obligations of one of such government jurisdictions which are not backed by
its full faith and credit and general taxing powers. An example of a semi-gov-
ernmental issuer is the City of Stockholm.
INVESTMENT PRACTICES
The Portfolio may utilize various investment strategies to hedge its invest-
ment portfolio against currency and other risks. The Portfolio may write cov-
ered put and call options and purchase put and call options on U.S. and for-
eign securities exchanges and over-the-counter, enter into contracts for the
purchase and sale for future delivery of fixed income securities or foreign
currencies or contracts based on financial indices or common stocks and pur-
chase and write put and call options on such futures contracts or on foreign
currencies and purchase or sell forward foreign currency exchange contracts.
In furtherance of its investment policies, the Portfolio may enter into inter-
est rate swaps and may purchase or sell interest rate caps and floors and may
purchase and sell options on fixed income securities. The Portfolio may also
enter into forward commitments for the purchase or sale of securities, enter
into repurchase agreements, standby commitments and make secured loans of its
portfolio securities. See "Other Investment Policies and Techniques."
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal income tax purposes, provided that at all times when a short
position is open the Portfolio owns an equal amount of such securities of the
same issue as, and equal in amount to, the securities sold short. In addition,
the Portfolio may not make a short
54
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sale if more than 10% of the Portfolio's net assets (taken at market value) is
held as collateral for short sales at any one time. If the price of the secu-
rity sold short increases between the time of the short sale and the time the
Portfolio replaces the borrowed security, the Portfolio will incur a loss;
conversely, if the price declines, the Portfolio will realize a capital gain.
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objective and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
GROWTH INVESTORS PORTFOLIO AND CONSERVATIVE INVESTORS PORTFOLIO
The Conservative Investors Portfolio and Growth Investors Portfolio invest in
a variety of fixed-income securities, money market instruments and equity se-
curities, each pursuant to a different asset allocation strategy, as described
below. The term "asset allocation" is used to describe the process of shifting
assets among discrete categories of investments in an effort to adjust risk
while producing desired return objectives. Portfolio management, therefore,
will consist not only of specific securities selection but also of setting,
monitoring and changing, when necessary, the asset mix.
Each Portfolio has been designed with a view toward a particular "investor
profile." The "conservative investor" has a relatively short-term investment
bias, either because of a limited tolerance for market volatility or a short
investment horizon. This investor is adverse to taking risks that may result
in principal loss, even though such aversion may reduce the potential for
higher long-term gains and result in lower performance during periods of eq-
uity market strength. Consequently, the asset mix for the Conservative Invest-
ors Portfolio attempts to reduce volatility while providing modest upside po-
tential. The "growth investor" has a longer-term investment horizon and is
therefore willing to take more risks in an attempt to achieve long-term growth
of principal. This investor wishes, in effect, to be risk conscious without
being risk averse. The asset mix for the Growth Investors Portfolio should
therefore provide for upside potential without excessive volatility.
The Adviser has established an asset allocation committee (the "Committee"),
all the members of which are employees of the Adviser, which is responsible
for setting and continually reviewing the asset mix ranges of each Portfolio.
The Committee generally meets at least twice each month. Under normal market
conditions, the Committee is expected to change allocation ranges approxi-
mately three to five times per year. However, the Committee has broad latitude
to establish the frequency, as well as the magnitude, of allocation changes
within the guidelines established for each Portfolio. During periods of severe
market disruption, allocation ranges may change frequently. It is also possi-
ble that in periods of stable and consistent outlook no change will be made.
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The Committee's decisions are based on and may be limited by a variety of fac-
tors, including liquidity, portfolio size, tax consequences and general market
conditions, always within the context of the appropriate investor profile for
each Portfolio. Consequently, asset mix decisions for the Conservative Invest-
ors Portfolio particularly emphasize risk assessment of each asset class
viewed over the shorter term, while decisions for the Growth Investors Portfo-
lio are principally based on the longer term total return potential for each
asset class.
The Portfolios are permitted to use a variety of hedging techniques to attempt
to reduce market interest rate and currency risks.
INVESTMENT POLICIES
Conservative Investors Portfolio. The investment objective of the Conservative
Investors Portfolio is to achieve a high total return without, in the view of
the Adviser, undue risk of principal. The Conservative Investors Portfolio at-
tempts to achieve its investment objective by allocating varying portions of
its assets among investment grade, publicly traded fixed-income securities,
money market instruments and publicly traded common stocks and other equity
securities of United States and non-United States issuers. The average
weighted maturity of the Portfolio's portfolio of fixed-income securities is
expected to vary between less than one year to 30 years. See "Other Investment
Policies and Techniques -- Fixed Income Securities."
All fixed-income securities owned by the Portfolio will be of investment
grade. This means that they will be in one of the top four rating categories
assigned by S&P or Moody's or will be unrated securities of comparable quality
as determined by the Adviser. Securities in the fourth such rating category
(rated Baa by Moody's or BBB by S&P) have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments on such obliga-
tions than in the case of higher-rated securities. See "Other Investment Poli-
cies and Techniques -- Securities Ratings," "-- Investment in Fixed-Income Se-
curities Rated Baa and BBB" and Appendix A. In the event that the rating of
any security held by the Conservative Investors Portfolio falls below invest-
ment grade (or, in the case of an unrated security, the Adviser determines
that it is no longer of investment grade), the Portfolio will not be obligated
to dispose of such security and may continue to hold the obligation if, in the
opinion of the Adviser, such investment is considered appropriate in the cir-
cumstances.
Equity securities invested in by the Conservative Investors Portfolio will
consist of common stocks and securities convertible into common stocks, such
as convertible bonds, convertible preferred stocks and warrants, issued by
companies with a favorable outlook for earnings and whose rate of growth is
expected to exceed that of the United States' economy over time.
The Conservative Investors Portfolio will at all times hold at least 40% of
its total assets in investment grade fixed-income securities, each having a
duration less than that of a 10-year Treasury bond (the "Fixed Income Core").
The duration of a fixed-income security is the weighted average maturity, ex-
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pressed in years, of the present value of all future cash flows, including
coupon payments and principal repayments.
The Conservative Investors Portfolio is generally expected to hold approxi-
mately 70% of its total assets in fixed-income securities (including the Fixed
Income Core) and 30% in equity securities. Actual asset mixes will be adjusted
in response to economic and credit market cycles. The fixed-income asset class
will always comprise at least 50%, but never more than 90%, of the Portfolio's
total assets. The equity class will always comprise at least 10%, but never
more than 50%, of the Portfolio's total assets. The fixed-income class in-
cludes money market instruments. For temporary defensive purposes, the Portfo-
lio may invest in money market instruments.
Growth Investors Portfolio. The investment objective of the Growth Investors
Portfolio is to achieve the highest total return consistent with the Adviser's
determination of reasonable risk. The Portfolio attempts to achieve its in-
vestment objective by allocating varying portions of its assets among a number
of asset classes. Equity investments will include publicly traded common
stocks and other equity securities of the type in which the Conservative In-
vestors Portfolio may invest but may also include equity securities issued by
intermediate and small-sized companies with favorable growth prospects, compa-
nies in cyclical industries, companies whose securities are temporarily under-
valued, companies in special situations and less widely known companies.
Fixed-income investments will include investment grade fixed-income securities
(including cash and money market instruments) and may include securities that
are rated in the lower rating categories by recognized ratings agencies (i.e.,
Ba or lower by Moody's or BB or lower by S&P) or that are unrated but deter-
mined by the Adviser to be of comparable quality. Lower-rated fixed-income se-
curities generally provide greater current income than higher rated fixed-in-
come securities, but are subject to greater credit and market risk. The Port-
folio will not invest more than 25% of its total assets in securities rated
below investment grade, that is, securities rated Ba or lower by Moody's or BB
or lower by S&P, or unrated securities deemed to be of comparable quality by
the Adviser. See "Other Investment Policies and Techniques -- Securities Rat-
ings," "-- Investment in Lower-Rated Fixed-Income Securities" and Appendix A.
The Growth Investors Portfolio will at all times hold at least 40% of its to-
tal assets in publicly traded common stocks and other equity securities of the
type purchased by the Conservative Investors Portfolio (the "Equity Core").
The Growth Investors Portfolio is generally expected to hold approximately 70%
of its total assets in equity securities (including the Equity Core) and 30%
in fixed-income securities. Actual asset mixes will be adjusted in response to
economic and credit market cycles. The fixed-income asset class will always
comprise at least 10%, but never more than 60%, of the Portfolio's total as-
sets. The equity class will always comprise at least 40%, but never more than
90%, of the Portfolio's total assets. The fixed-income class includes money
market instruments. The average weighted maturity of the Portfolio's portfolio
of fixed-income securities is expected to vary between less than one year to
30 years. See "Other Invest-
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<PAGE>
ment Policies and Techniques -- Fixed Income Securities." For temporary defen-
sive purposes, the Portfolio may invest in money market instruments.
ADDITIONAL INVESTMENT POLICIES AND TECHNIQUES
Foreign Securities. Each of the Conservative Investors Portfolio and Growth In-
vestors Portfolio may invest without limit in securities which are not publicly
traded in the United States, although the Conservative Investors Portfolio gen-
erally will not invest more than 15% of its total assets, and the Growth In-
vestors Portfolio generally will not invest more than 30% of its total assets,
in such securities.
The Growth Investors Portfolio may invest a portion of its assets in developing
countries or in countries with new or developing capital markets. The risks as-
sociated with investment in foreign securities are generally intensified for
these investments. These countries may have relatively unstable governments,
economies based on only a few industries or securities markets that trade a
small number of securities. Securities of issuers located in these countries
tend to have volatile prices and may offer significant potential for loss as
well as gain.
The value of foreign investments measured in U.S. dollars will rise or fall be-
cause of decreases, respectively, in the value of the U.S. dollar in comparison
to the value of the currency in which the foreign investment is denominated.
The Portfolios may buy or sell foreign currencies, options on foreign curren-
cies, foreign currency futures contracts (and related options) and deal in for-
ward foreign currency exchange contracts in connection with the purchase and
sale of foreign investments.
For a description of certain risks associated with investing in foreign securi-
ties, see "Other Investment Policies and Techniques--Foreign Securities," be-
low.
Non-Publicly Traded Securities. Each Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quotations
may not be readily available. As a result, a Portfolio may not be able to sell
these securities (other than Rule 144A Securities) unless they are registered
under applicable Federal and state securities laws, or may have to sell them at
less than fair market value. Investment in these securities is restricted to 5%
of a Portfolio's total assets (not including for these purposes Rule 144A Secu-
rities, to the extent permitted by applicable law) and is also subject to the
Portfolio's restriction against investing more than 15% of total assets in il-
liquid securities. To the extent permitted by applicable law, Rule 144A Securi-
ties will not be treated as "illiquid" for purposes of the foregoing restric-
tion so long as such securities meet liquidity guidelines established by the
Board of Directors. See "Other Investment Policies and Techniques -- Illiquid
Securities," below.
Mortgage-Backed Securities. Each Portfolio may invest in mortgage-backed secu-
rities, including collateralized mortgage obligations or "CMOs." Interest and
principal payments (including prepayments) on the mort-
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gages underlying mortgage-backed securities are passed through to the holders
of the mortgage-backed security. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayments are im-
portant because of their effect on the yield and price of the mortgage-backed
securities. During periods of declining interest rates, such prepayments can
be expected to accelerate and the Portfolios would be required to reinvest the
proceeds at the lower interest rates then available. In addition, prepayments
of mortgages which underlie securities purchased at a premium could result in
capital losses.
The Portfolios may also invest in certificates representing rights to receive
payments of the interest only or principal only of mortgage-backed securities
("IO/PO Strips"). These securities may be more volatile than other types of
securities. IO Strips involve the additional risk of loss of the entire re-
maining value of the investment if the underlying mortgages were prepaid.
Adjustable Rate Securities. Each Portfolio may invest in adjustable rate secu-
rities. Adjustable rate securities are securities that have interest rates
that are reset at periodic intervals, usually by reference to some interest
rate index or market interest rate. Some adjustable rate securities are backed
by pools of mortgage loans. Although the rate adjustment feature may act as a
buffer to reduce sharp changes in the value of adjustable rate securities,
these securities are still subject to changes in value based on changes in
market interest rates or changes in the issuer's creditworthiness. Because the
interest rate is reset only periodically, changes in the interest rate on ad-
justable rate securities may lag behind changes in prevailing market interest
rates. Also, some adjustable rate securities (or the underlying mortgages) are
subject to caps or floors that limit the maximum change in interest rate dur-
ing a specified period or over the life of the security.
Asset-Backed Securities. Each Portfolio may invest in asset-backed securities
which represent fractional interests in pools of leases, retail installment
loans or revolving credit receivables, both secured and unsecured. These as-
sets are generally held by a trust and payments of principal and interest or
interest only are passed through monthly or quarterly to certificate holders
and may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or origina-
tor of the trust.
Underlying automobile sales contracts or credit card receivables are subject
to prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal repayment rates tend not to vary much with interest
rates and the short-term nature of the underlying car loans or other receiv-
ables tends to dampen the impact of any change in the prepayment level.
Certifi-
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cate holders may also experience delays in payment on the certificates if the
full amounts due on underlying sales contracts or receivables are not realized
by the trust because of unanticipated legal or administrative costs of enforc-
ing the contracts or because of depreciation or damage to the collateral (usu-
ally automobiles) securing certain contracts, or other factors. If consistent
with its investment objective and policies, the Portfolio may invest in other
asset-backed securities that may be developed in the future.
Investments in High-Yield Securities. The Growth Investors Portfolio may in-
vest in high-yield, high-risk, fixed-income and convertible securities rated
at the time of purchase Ba or lower by Moody's or BB or lower by S&P, or, if
unrated, judged by the Adviser to be of comparable quality ("high-yield secu-
rities"). The Growth Investors Portfolio will generally invest in securities
with a minimum rating of Caa by Moody's or CCC by S&P or in unrated securities
judged by the Adviser to be of comparable quality. However, from time to time,
the Portfolio may invest in securities rated in the lowest grades of Moody's
(C) or S&P (D) or in unrated securities judged by the Adviser to be of compa-
rable quality, if the Portfolio's management determines that there are pros-
pects for an upgrade or a favorable conversion into equity securities (in the
case of convertible securities). Securities rated Ba or BB or lower (and com-
parable unrated securities) are commonly referred to as "junk bonds." Securi-
ties rated D by S&P are in default. As of December 31, 1996, 19.8% of the
Portfolio's assets were invested in fixed-income securities all rated (or con-
sidered by the Adviser to be of equivalent quality to securities rated) in the
category A and above. See "Other Investment Policies and Techniques -- Securi-
ties Ratings," "-- Investment in Lower-Rated Fixed-Income Securities" and Ap-
pendix A.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in the case of
unrated securities, the Adviser determines that the quality of such security
has deteriorated since purchased by the Portfolio), the Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the Adviser, such investment is considered appropriate
in the circumstances.
Convertible Securities. Each Portfolio may invest in convertible securities.
These securities normally provide a higher yield than the underlying stock but
lower than a fixed-income security without the convertible feature. Also, the
price of the convertible security will normally vary to some degree with
changes in the price of the underlying stock although in some market condi-
tions the higher yield tends to make the convertible security less volatile
than the underlying common stock. In addition, the price of the convertible
security will also vary to some degree inversely with interest rates. Convert-
ible debt securities that are rated below BBB (S&P) or Baa (Moody's) or compa-
rable unrated securities as determined by the Adviser may share some or all of
the risks of high-yield securities. For a description of these risks, see "In-
vestments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolios may at times invest in
so-
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called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are
issued at a significant discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or in additional
bonds. Because zero-coupon bonds do not pay current interest, their value is
generally subject to greater fluctuation in response to changes in market in-
terest rates than bonds which pay interest currently. Both zero-coupon and
payment-in-kind bonds allow an issuer to avoid the need to generate cash to
meet current interest payments. Accordingly, such bonds may involve greater
credit risks than bonds paying interest currently. Even though such bonds do
not pay current interest in cash, a Portfolio is nonetheless required to ac-
crue interest income on such investments and to distribute such amounts at
least annually to shareholders. Thus, a Portfolio could be required at times
to liquidate other investments in order to satisfy its dividend requirements.
Futures and Options. Each Portfolio may buy and sell stock index futures con-
tracts ("index futures") and may buy options on index futures and on stock in-
dices for hedging purposes. A Portfolio may buy and sell call and put options
on index futures or on stock indices in addition to, or as an alternative to,
purchasing or selling index futures or, to the extent permitted by applicable
law, to earn additional income. The Portfolios may also, for hedging purposes,
purchase and sell futures contracts, options thereon and options with respect
to U.S. Treasury securities, including U.S. Treasury bills, notes and bonds.
Each Portfolio may also seek to increase its current return by writing covered
call and put options on securities it owns or in which it may invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
stock index or security or of the securities in a Portfolio's portfolio that
are the subject of a hedge. The successful use of the strategies described
above further depends on the Portfolio's Adviser's ability to forecast market
movements correctly. Other risks arise from a Portfolio's potential inability
to close out its futures or options positions. In addition there can be no as-
surance that a liquid secondary market will exist for any future or option at
any particular time. Certain provisions of the Internal Revenue Code and cer-
tain regulatory requirements may limit the Portfolios' ability to engage in
futures and options transactions.
Securities Loans, Repurchase Agreements and Forward Commitments. Each Portfo-
lio may lend portfolio securities amounting to not more than 25% of its total
assets and may enter into repurchase agreements on up to 25% of its total as-
sets. These transactions must be fully collateralized at all times, but in-
volve some risk to a Fund if the other party should default on its obligation
and the Portfolio is delayed or prevented from recovering the collateral. Each
Portfolio may also purchase securities for future delivery, which may increase
its overall investment exposure and involves a risk of loss if the value of
the securities declines prior to the settlement date.
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GROWTH PORTFOLIO
General. The Growth Portfolio's investment objective is to provide long-term
growth of capital. Current income is only an incidental consideration. The
Portfolio attempts to achieve its objective by investing primarily in equity
securities of companies with a favorable outlook for earnings and whose rate of
growth is expected to exceed that of the United States economy over time.
The Portfolio invests primarily in common stocks and securities convertible
into common stocks such as convertible bonds, convertible preferred stocks and
warrants convertible into common stocks. Because the values of fixed-income se-
curities are expected to vary inversely with changes in interest rates general-
ly, when the Adviser expects a general decline in interest rates, the Portfolio
may also invest for capital growth in fixed-income securities. The Portfolio
may invest up to 25% of its total assets in fixed-income securities rated at
the time of purchase below investment grade, that is, securities rated Ba or
lower by Moody's or BB or lower by S&P, or in unrated fixed income securities
determined by the Adviser to be of comparable quality. For a description of the
ratings referred to above, see Appendix A. For temporary defensive purposes,
the Portfolio may invest in money market instruments and repurchase agreements.
Foreign Securities. The Portfolio may invest without limit in securities which
are not publicly traded in the United States, although the Portfolio generally
will not invest more than 15% of its total assets in such securities.
The value of foreign investments measured in U.S. dollars will rise or fall be-
cause of decreases or increases, respectively, in the value of the U.S. dollar
in comparison to the value of the currency in which the foreign investment is
denominated. The Fund may buy or sell foreign currencies, options on foreign
currencies, foreign currency futures contracts (and related options) and deal
in forward foreign currency exchange contracts in connection with the purchase
and sale of foreign investments. For a description of certain risks associated
with investing in foreign securities, see "Other Investment Policies and Tech-
niques -- Foreign Securities," below.
Non-Publicly Traded Securities. The Portfolio may invest in securities which
are not publicly traded, including securities sold pursuant to Rule 144A under
the Securities Act of 1933 ("Rule 144A Securities"). The sale of these securi-
ties is usually restricted under Federal securities laws, and market quotations
may not be readily available. As a result, the Portfolio may not be able to
sell these securities (other than Rule 144A Securities) unless they are regis-
tered under applicable Federal and state securities laws, or may have to sell
them at less than fair market value. Investment in these securities is re-
stricted to 5% of the Portfolio's total assets (not including for these pur-
poses Rule 144A Securities, to the extent permitted by applicable law) and is
also subject to the Portfolio's restriction against investing more than 15% of
total assets in illiquid securities. To the extent permitted by applicable law,
Rule 144A Securities will not be treated as "illiquid" for purposes of the
foregoing restriction so long as such securities meet liquidity guidelines es-
tablished by the Board of Directors. See "Other Investment Policies and Tech-
niques -- Illiquid Securities," below.
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Investments in High-Yield Securities. The Growth Portfolio may invest in high-
yield, high-risk, fixed-income and convertible securities rated at the time of
purchase Ba or lower by Moody's BB or lower by S&P, or, if unrated, judged by
the Adviser to be of comparable quality ("high-yield securities"). The Portfo-
lio will generally invest in securities with a minimum rating of Caa by Moody's
or CCC by S&P or in unrated securities judged by the Adviser to be of compara-
ble quality. However, from time to time, the Portfolio may invest in securities
rated in the lowest grades of Moody's (C) or S&P (D) or in unrated securities
judged by the Adviser to be of comparable quality, if the Portfolio's manage-
ment determines that there are prospects for an upgrade or a favorable conver-
sion into equity securities (in the case of convertible securities). Securities
rated Ba or BB or lower (and comparable unrated securities) are commonly re-
ferred to as "junk bonds." Securities rated D by S&P are in default. See "Other
Investment Policies and Techniques -- Securities Ratings," "Investment in Low-
er-Rated Fixed-Income Securities" and Appendix A. As of December 31, 1996, the
percentages of the Portfolio's assets invested in securities rated (or consid-
ered by the Adviser to be of equivalent quality to securities rated) in partic-
ular rating categories were 0.37% in B and 0% in Caa or CCC.
In the event that the credit rating of a high-yield security held by the Port-
folio falls below its rating at the time of purchase (or, in the case of
unrated securities, the Adviser determines that the quality of such security
has deteriorated since purchased by the Portfolio), the Portfolio will not be
obligated to dispose of such security and may continue to hold the obligation
if, in the opinion of the Adviser, such investment is considered appropriate in
the circumstances.
Convertible Securities. The Growth Portfolio may invest in convertible securi-
ties. These securities normally provide a higher yield than the underlying
stock but lower than a fixed-income security without the convertible feature.
Also, the price of the convertible security will normally vary to some degree
with changes in the price of the underlying stock although in some market con-
ditions the higher yield tends to make the convertible security less volatile
than the underlying common stock. In addition, the price of the convertible se-
curity will also vary to some degree inversely with interest rates. Convertible
debt securities that are rated below BBB (S&P) or Baa (Moody's) or comparable
unrated securities as determined by the Adviser may share some or all of the
risks of high-yield securities. For a description of these risks, see "Invest-
ments in High-Yield Securities" above.
Zero-Coupon and Payment-in-Kind Bonds. The Portfolio may at times invest in so-
called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon bonds are
issued at a significant discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or in additional
bonds. Because zero-coupon bonds do not pay current interest, their value is
generally subject to greater fluctuation in response to changes in market in-
terest rates than bonds which pay interest currently. Both zero-coupon and pay-
ment-in-kind bonds allow an issuer to avoid the need to
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generate cash to meet current interest payments. Accordingly, such bonds may
involve greater credit risks than bonds paying interest currently. Even though
such bonds do not pay current interest in cash, the Fund is nonetheless re-
quired to accrue interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could be required at
times to liquidate other investments in order to satisfy its dividend require-
ments.
Futures and Options. The Portfolio may buy and sell stock index futures con-
tracts ("index futures") and may buy options on index futures and on stock in-
dices for hedging purposes. The Portfolio may buy and sell call and put options
on index futures or on stock indices in addition to, or as an alternative to,
purchasing or selling index futures or, to the extent permitted by applicable
law, to earn additional income. The Portfolio may also, for hedging purposes,
purchase and sell futures contracts, options thereon and options with respect
to the U.S. Treasury securities, including U.S. Treasury bills, notes and
bonds. The Portfolio may also seek to increase its current return by writing
covered call and put options on securities its owns or in which it may invest.
The use of futures and options involves certain special risks. Futures and op-
tions transactions involve costs and may result in losses. Certain risks arise
because of the possibility of imperfect correlations between movements in the
prices of futures and options and movements in the prices of the underlying
stock index or security or of the securities in the Portfolio's portfolio that
are the subject of the hedge. The successful use of the strategies described
above further depends on the Adviser's ability to forecast market movements
correctly. Other risks arise from the Portfolio's potential inability to close
out its futures or options positions. In addition there can be no assurance
that a liquid secondary market will exist for any future option at any particu-
lar time. Certain provisions of the Internal Revenue Code and certain regula-
tory requirements may limit the Portfolio's ability to engage in futures and
options transactions.
Securities Loans, Repurchase Agreements and Forward Commitments. The Portfolio
may lend portfolio securities amounting to not more than 25% of its total as-
sets and may enter into repurchase agreements on up to 25% of its total assets.
These transactions must be fully collateralized at all times but involve some
risk to the Portfolio if the other party should default on its obligation and
the Portfolio is delayed or prevented from recovering the collateral. The Port-
folio may also purchase securities for future delivery, which may increase its
overall investment exposure and involve a risk of loss if the value of the se-
curities declines prior to the settlement date.
WORLDWIDE PRIVATIZATION PORTFOLIO
The Worldwide Privatization Portfolio's investment objective is to seek long
term capital appreciation. In seeking to achieve its investment objective, as a
fundamental policy, the Portfolio will invest at least 65% of its total assets
in equity securities that are issued by enterprises that are undergoing, or
that have undergone, privatization as described below, although normally, sig-
nificantly more of the Portfolio's total assets will be invested in such secu-
rities. The bal-
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ance of the Portfolio's investment portfolio will include securities of compa-
nies that are believed by the Adviser to be beneficiaries of the privatization
process. Equity securities include common stock, preferred stock, rights or
warrants to subscribe for or purchase common or preferred stock, securities
(including debt securities) convertible into common or preferred stock and
securities that give the holder the right to acquire common or preferred stock.
Investment in Privatizations. The Portfolio is designed for investors desiring
to take advantage of investment opportunities, historically inaccessible to
U.S. individual investors, that are created by privatizations of state enter-
prises in both established and developing economies, including those in Western
Europe and Scandinavia, Australia, New Zealand, Latin America, Asia and Eastern
and Central Europe and, to a lesser degree, Canada and the United States.
The Portfolio's investments in the securities of enterprises undergoing
privatization may comprise three distinct situations. First, the Portfolio may
invest in the initial offering of equity securities of a government- or state-
owned or controlled company or enterprise (a "state enterprise") that are
traded in a recognized national or international securities market (an "initial
equity offering"). Secondly, the Portfolio may invest in the securities of a
current or former state enterprise following its initial equity offering, in-
cluding the purchase of securities in any secondary offerings. Finally, the
Portfolio may make privately negotiated investments in a state enterprise that
has not yet conducted an initial equity offering. Investments of this type may
be structured, for example, as privately negotiated sales of stock or other eq-
uity interests in joint ventures, cooperatives or partnerships. In the opinion
of the Adviser, substantial potential for appreciation in the value of equity
securities of an enterprise undergoing or following privatization exists as the
enterprise rationalizes its management structure, operations and business
strategy to position itself to compete efficiently in a market economy, and the
Portfolio will seek to emphasize investments in the equity securities of such
enterprises.
The Portfolio intends to spread its portfolio investments among the capital
markets of a number of countries and, under normal market conditions, will in-
vest in the equity securities of issuers based in at least four, and normally
considerably more, countries. The percentage of the Portfolio's assets invested
in equity securities of companies based in a particular country will vary in
accordance with the Adviser's assessment of the appreciation potential of such
securities. There is no restriction, however, on the percentage of the Portfo-
lio's assets that may be invested in countries within any one region of the
world. To the extent that the Portfolio's assets are invested within any one
region, the Portfolio may be subject to any special risks that may be associ-
ated with that region. Notwithstanding the foregoing, no more than 15% of the
Portfolio's total assets will be invested in securities of issuers in any one
foreign country, except that the Portfolio may invest up to 30% of its total
assets in securities of issuers in any one of France, Germany, Great Britain,
Italy and Japan.
Privatization is a process through which the ownership and control of companies
or assets changes in whole or in part from the
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public sector to the private sector. Through privatization a government or
state divests or transfers all or a portion of its interest in a state enter-
prise to some form of private ownership. In contrast, nationalization is the
process through which a government or state assumes control of a privately
owned enterprise. Privatizations may take the form of individually negotiated
transactions, including trade sales or management buy-outs, or an offering of
equity securities. Governments and states with established economies, includ-
ing, among others, France, Great Britain, Germany and Italy, and those with
developing economies, including, among others, Argentina, Mexico, Chile, Indo-
nesia, Malaysia, Poland and Hungary, are currently engaged in privatizations.
The Portfolio will invest in the securities of enterprises, in any country,
that in the Adviser's opinion present attractive investment opportunities, and
the countries in which the Portfolio will invest may change from time to time.
It is the Adviser's intention to invest approximately 70% of the Portfolio's
total assets in securities of enterprises located in countries with estab-
lished economies and the remainder of the Portfolio's assets in securities of
enterprises located in countries with developing economies.
The trend toward privatization of state enterprises is a global phenomenon
that the Adviser expects will continue into the next century. In addition, the
Adviser believes that a global portfolio of equity securities of state enter-
prises that are undergoing privatiza- tion offers investors the opportunity
for significant capital appreciation relative to local and regional stock mar-
ket indices.
A major premise of the Portfolio's investment approach is that, because of the
particular characteristics of privatized companies, their equity securities
offer investors opportunities for significant capital appreciation. In partic-
ular, because privatization programs are an important part of a country's eco-
nomic restructuring, equity securities that are brought to the market by means
of initial equity offerings frequently are priced to attract investment in or-
der to secure the issuer's successful transition to private sector ownership.
In addition, these enterprises generally tend to enjoy dominant market posi-
tions in their local markets. Because of the relaxation of government controls
upon privatization, these enterprises typically have the potential for signif-
icant managerial and operational efficiency gains, which, among other factors,
can increase their earnings due to the restructuring that accompanies
privatization and the incentives management frequently receives.
Individual regions and countries have different histories of involvement in
the privatization process. For example, the countries that formerly consti-
tuted the Soviet Union and the Eastern Bloc are currently exploring
privatization partly as a means of integrating into the international communi-
ty, while certain Western European and Latin American countries have had
privatization programs in place for more than ten years. The cumulative gross
proceeds from major privatizations worldwide increased from $39.5 billion in
1988 to $310 billion in 1994.
Privatization programs are established to address a range of economic, politi-
cal or social needs. Privatization is generally viewed as a means to achieve
increased efficiency
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and improve the competitiveness of state enterprises. Western European coun-
tries are currently engaged in privatization programs partly as a means of in-
creasing government revenues, thereby reducing budget deficits. The reduction
of budget deficits recently has become an important objective as Western Euro-
pean countries attempt to meet the directives of the European Commission re-
garding debt and achieve the target budget deficit levels established by the
Maastricht Treaty. In developing market countries, including many of those in
Latin America and Asia, privatization is viewed as an integral part of broad
economic measures that are designed to reduce external debt and control infla-
tion as these countries attempt to meet the directives of the International
Bank for Reconstruction and Development (the World Bank) and the International
Monetary Fund regarding desirable debt levels. Within Eastern and Central Eu-
rope, privatization is also being used as a means of achieving structural eco-
nomic changes that will enable Eastern and Central European countries to
develop market economies and compete in the world markets.
The privatization of state enterprises is achieved through various methods. A
gradual approach is commonly taken at the early stages of privatization within
a country. Oftentimes, the government will transfer partial ownership of the
enterprise to a corporation or similar entity and occasionally also broaden
ownership to employees and citizens while retaining an interest. Occasionally,
a few selected foreign minority shareholders are permitted to make private in-
vestments at this stage. After the new corporation has operated under this
form of ownership for a few years, the government may divest itself completely
by means of an equity offering in national and international securities mar-
kets. Another approach is the formation of an investment fund owned by employ-
ees and citizens that, with the assistance of international managers, operates
one or many state enterprises for a set term, after which the government may
divest itself of its remaining interest. Foreign investors are often permitted
to become minority shareholders of these investment funds. In less gradual
privatizations, state enterprises are auctioned to qualified investors through
competitive bidding processes in private transactions. Alternatively, equity
offerings may be made directly through the local and international securities
markets.
Although the Portfolio anticipates that it generally will not concentrate its
investments in any industry, it is permitted, under certain conditions, to in-
vest more than 25% of its total assets in the securities of issuers whose pri-
mary business activity is that of national commercial banking. Prior to
concentrating in the securities of national commercial banks, the Fund's Board
of Directors would have to determine, based on factors in existence at the
time of the determination, such as liquidity, availability of investments and
anticipated returns, that the Portfolio's ability to achieve its investment
objective would be adversely affected if the Portfolio were not permitted to
invest more than 25% of its total assets in those securities. The Adviser an-
ticipates that such circumstances could include periods during which returns
on or market liquidity of investments in national commercial banks substan-
tially exceed those available on investments in other industries. The staff of
the Securities and Exchange Commission has in-
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dicated that, in its view, registered investment companies may not, absent
shareholder approval, change between concentration and non-concentration in the
securities of issuers in a single industry. The Portfolio disagrees with the
staff's position but has undertaken that it will not concentrate in the securi-
ties of national commercial banks until, if ever, the issue is resolved. To the
extent that the Portfolio invests more than 25% of its total assets in the na-
tional commercial banks, the Portfolio's performance could be significantly in-
fluenced by events or conditions affecting this industry and the Portfolio's
investments may be subject to greater risk and market fluctuation than those of
a fund that has in its portfolio securities representing a broader range of in-
vestment alternatives.
The national commercial banking industry is subject to, among other things, in-
creases in interest rates and deteriorations in general economic conditions.
Warrants. The Portfolio may invest up to 20% of its total assets in rights or
warrants which entitle the holder to buy equity securities at a specific price
for a specific period of time, but will do so only if the equity securities
themselves are deemed appropriate by the Adviser for inclusion in the Portfo-
lio's portfolio. Rights and warrants may be considered more speculative than
certain other types of investments in that they do not entitle a holder to div-
idends or voting rights with respect to the securities which may be purchased
nor do they represent any rights in the assets of the issuing company. Also,
the value of a right or warrant does not necessarily change with the value of
the underlying securities and a right or warrant ceases to have value if it is
not exercised prior to the expiration date.
Debt Securities and Convertible Debt Securities. The Portfolio may invest up to
35% of its total assets in debt securities and convertible debt securities of
issuers whose common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Debt securities include bonds, deben-
tures, corporate notes and preferred stocks. Convertible debt securities are
such instruments that are convertible at a stated exchange rate into common
stock. Prior to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide a stable
stream of income with generally higher yields than those of equity securities
of the same or similar issuers. The market value of debt securities and con-
vertible debt securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. While convertible securities
generally offer lower interest yields than non-convertible debt securities of
similar quality, they do enable the investor to benefit from increases in the
market price of the underlying common stock.
The Portfolio may maintain not more than 5% of its net assets in debt securi-
ties rated below Baa by Moody's and BBB by S&P, or, if not rated, determined by
the Adviser to be of equivalent quality. See "Other Investment Policies and
Techniques -- Securities Ratings," "-- Investment in Securities Rated Baa and
BBB," "-- Investment in Lower-Rated Fixed-Income Securities" and Appendix A.
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ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The Portfolio may, but is not required to, utilize various investment strate-
gies to hedge its portfolio against currency and other risks. These investment
strategies entail risks. Although the Adviser believes that these investment
strategies may further the Portfolio's investment objective, no assurance can
be given that they will achieve this result. The Portfolio may write covered
put and call options and purchase put and call options on U.S. and foreign se-
curities exchanges and over-the-counter, enter into contracts for the purchase
and sale for future delivery of fixed-income securities or foreign currencies
or contracts based on financial indices, including any index of U.S. Govern-
ment Securities or securities issued by foreign government entities or common
stocks and purchase and write put and call options on such futures contracts
or on foreign currencies, purchase or sell forward foreign currency exchange
contracts, enter into forward commitments for the purchase or sale of securi-
ties, enter into repurchase agreements, standby commitment agreements and cur-
rency swaps, make short sales of securities and make secured loans of its
portfolio securities. Certain of these investment strategies may not currently
be available in many of the countries in which the Portfolio may invest or may
not be permissible under current law. The Portfolio may engage in these
investment strategies in those countries when and to the extent such strate-
gies become available or permissible in the future. Except with regard to
those investment strategies discussed immediately below, each of these invest-
ment strategies is discussed under the caption "Other Investment Policies and
Techniques," below.
Currency Swaps. The Portfolio may enter into currency swaps for hedging pur-
poses. Currency swaps involve the exchange by the Portfolio with another party
of a series of payments in specified currencies. Since currency swaps are in-
dividually negotiated, the Portfolio expects to achieve an acceptable degree
of correlation between its portfolio investments and its currency swaps posi-
tions. A currency swap may involve the delivery at the end of the exchange pe-
riod of a substantial amount of one designated currency in exchange for the
other designated currency. Therefore the entire principal value of a currency
swap is subject to the risk that the other party to the swap will default on
its contractual delivery obligations. The net amount of the excess, if any, of
the Portfolio's obligations over its entitlements with respect to each cur-
rency swap will be accrued on a daily basis and an amount of cash or high-
grade liquid debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Portfolio's custodian. The Portfolio will not enter into any currency swap un-
less the credit quality of the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest rating category of
at least one nationally recognized rating organization at the time of entering
into the transaction. If there is a default by the other party to such a
transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transactions.
Short Sales. The Portfolio may make short sales of securities or maintain a
short position only for the purpose of deferring realization of gain or loss
for U.S. federal in-
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come tax purposes, provided that at all times when a short position is open the
Portfolio owns an equal amount of such securities of the same issue as, and
equal in amount to, the securities sold short. In addition, the Portfolio may
not make a short sale if more than 10% of the Portfolio's net assets (taken at
market value) is held as collateral for short sales at any one time. If the
price of the security sold short increases between the time of the short sale
and the time the Portfolio replaces the borrowed security, the Portfolio will
incur a loss; conversely, if the price declines, the Portfolio will realize a
capital gain.
Future Developments. The Portfolio may, following written notice to its share-
holders, take advantage of other investment practices which are not at present
contemplated for use by the Portfolio or which currently are not available but
which may be developed, to the extent such investment practices are both con-
sistent with the Portfolio's investment objective and legally permissible for
the Portfolio. Such investment practices, if they arise, may involve risks
which exceed those involved in the activities described above.
CERTAIN RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk considerations described
below.
Investment in Privatized Enterprises. The governments of certain foreign coun-
tries have, to varying degrees, embarked on privatization programs contemplat-
ing the sale of all or part of their interests in state enterprises. In certain
jurisdictions, the ability of foreign entities, such as the Portfolio, to par-
ticipate in privatizations may be limited by local law, or the price or terms
on which the Portfolio may be able to participate may be less advantageous than
for local investors. Moreover, there can be no assurance that governments that
have embarked on privatization programs will continue to divest their ownership
of state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized. Fur-
thermore, in the case of certain of the enterprises in which the Portfolio may
invest, large blocks of the stock of those enterprises may be held by a small
group of stockholders, even after the initial equity offerings by those enter-
prises. The sale of some portion or all of those blocks could have an adverse
effect on the price of the stock of any such enterprise.
Most state enterprises or former state enterprises go through an internal reor-
ganization of management prior to mailing an initial equity offering in an at-
tempt to better enable these enterprises to compete in the private sector. How-
ever, certain reorganizations could result in a management team that does not
function as well as the enterprise's prior management and may have a negative
effect on such enterprise. After making an initial equity offering enterprises
which may have enjoyed preferential treatment from the respective state or gov-
ernment that owned or controlled them may no longer receive such preferential
treatment and may become subject to market competition from which they were
previously protected. Some of these enterprises may not be able to effectively
operate in a competitive market and may suffer losses or experience bankruptcy
due to such competition. In addition, the privatization of an en-
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terprise by its government may occur over a number of years, with the govern-
ment continuing to hold a controlling position in the enterprise even after the
initial equity offering for the enterprise.
Currency Considerations. Because substantially all of the Portfolio's assets
will be in-
vested in securities denominated in foreign currencies and a corresponding por-
tion of the Portfolio's revenues will be received in such currencies, the dol-
lar equivalent of the Portfolio's net assets and distributions will be ad-
versely affected by reductions in the value of certain foreign currencies rela-
tive to the U.S. dollar. Such changes will also affect the Portfolio's income.
The Portfolio will, however, have the ability to protect itself against adverse
changes in the values of foreign currencies by engaging in certain of the in-
vestment practices listed above. If the value of the foreign currencies in
which the Portfolio receives its income falls relative to the U.S. dollar be-
tween receipt of the income and the making of Portfolio distributions, the
Portfolio may be required to liquidate securities in order to make distribu-
tions if the Portfolio has insufficient cash in U.S. dollars to meet distribu-
tion requirements. Similarly, if an exchange rate declines between the time the
Portfolio incurs expenses in U.S. dollars and the time cash expenses are paid,
the amount of the currency required to be converted into U.S. dollars in order
to pay expenses in U.S. dollars could be greater than the equivalent amount of
such expenses in the currency at the time they were incurred. In light of these
risks, the Portfolio may engage in certain currency hedging transactions, which
themselves involve certain special risks. See "Other Investment Policies and
Techniques -- Hedging Techniques."
Risk of Foreign Investment. For a description of certain risks associated with
investing in foreign securities, see "Other Investing Policies and Tech-
niques -- Foreign Securities," below.
TECHNOLOGY PORTFOLIO
The Technology Portfolio is a diversified investment portfolio that emphasizes
growth of capital and invests for capital appreciation, and only incidentally
for current income. The Portfolio invests primarily in securities of companies
expected to benefit from technological advances and improvements (i.e., compa-
nies that use technology extensively in the development of new or improved
products or processes). The Portfolio will normally have at least 80% of its
assets invested in the securities of these companies. The Portfolio normally
will have substantially all its assets invested in equity securities, but it
also invests in debt securities offering an opportunity for price appreciation.
The Portfolio will invest in listed and unlisted securities and U.S. and for-
eign securities, but it will not purchase a foreign security if as a result 10%
or more of the Portfolio's total assets would be invested in foreign
securities.
The Technology Portfolio's policy is to invest in any company and industry and
in any type of security with potential for capital appreciation. It invests in
well-known and established companies and in new and unseasoned companies.
The Portfolio may maintain up to 15% of its net assets in illiquid securities,
lend portfolio securities equal in value to not more than 30% of the Technology
Portfolio's total assets and invest up to 10% of its total assets in foreign
securities.
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Options. In an effort to increase current income and to reduce fluctuations in
net asset value, the Technology Portfolio intends to write covered call op-
tions and purchase put and call options on securities of the types in which it
is permitted to invest that are traded on U.S. and foreign securities ex-
changes. A call option written by the Portfolio is "covered" if the Portfolio
(i) owns the underlying security covered by the call (ii) has an absolute and
immediate right to acquire that security without additional cash consideration
(or for additional cash consideration held in a segregated account by the
Fund's Custodian) upon conversion or exchange of other portfolio securities,
or (iii) holds a call on the same security in the same principal amount as the
call written where the exercise price of the call held (i) is equal to or less
than the exercise price of the call written or (ii) is greater than the exer-
cise price of the call written if the difference is maintained by the Portfo-
lio in cash and liquid high-grade debt securities in a segregated account with
the Fund's Custodian. The premium paid by the purchaser of an option will re-
flect, among other things, the relationship of the exercise price to the mar-
ket price and volatility of the underlying security, the remaining term of the
option, supply and demand and interest rates.
The Technology Portfolio will not write uncovered call options and will not
write a call option if the premium to be received by the Portfolio in doing so
would not produce an annualized return of at least 15% of the then current
market value of the securities subject to the option (without giving effect to
commissions, stock transfer taxes and other expenses that are deducted from
premium receipts). The Portfolio will not write a call option if, as a result,
the aggregate of the Portfolio's securities subject to outstanding call op-
tions (valued at the lower of the option price or market value of such securi-
ties) would exceed 15% of the Portfolio's total assets or more than 10% of the
Portfolio's assets would be committed to call options that at the time of sale
have a remaining term of more than 100 days. The aggregate cost of all out-
standing options purchased and held by the Portfolio will at no time exceed
10% of the Portfolio's total assets.
The Technology Portfolio may purchase or write options on securities of the
types in which it is permitted to invest in privately negotiated transactions.
The Portfolio will effect such transactions only with investment dealers and
other financial institutions (such as commercial banks or savings and loan in-
stitutions) deemed creditworthy by the Adviser, and the Adviser has adopted
procedures for monitoring the creditworthiness of such entities. Options pur-
chased or written by a Portfolio in negotiated transactions are illiquid and
it may not be possible for the Portfolio to effect a closing transaction at a
time when the Adviser believes it would be advantageous to do so. See "Illiq-
uid Securities." See Appendix D in the Statement of Additional Information for
a further discussion of the use, risks and costs of option trading.
The Technology Portfolio may purchase and sell exchange-traded options on any
securities index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a security except
that, rather than the right to take or make delivery of a security at a speci-
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fied price, an option on a securities index gives the holder the right to re-
ceive, upon exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option.
Rights and Warrants. The Technology Portfolio may also invest up to 10% of its
total assets in rights and warrants. The Portfolio will invest in right and
warrants only if the underlying equity securities themselves are deemed appro-
priate by the Adviser for inclusion in the Portfolio. Rights and warrants en-
title the holder to buy equity securities at a specific price for a specific
period of time. Right are similar to warrants except that they have a substan-
tially shorter duration. Rights and warrants may be considered more specula-
tive than certain other types of investments in that they do not entitle a
holder to dividends or voting rights with respect to the underlying securities
nor do they represent any rights in the assets of the issuing company. The
value of a warrant does not necessarily change with the value of the under-
lying security, although the value of a right or warrant may decline because
of an increase in the value of the underlying security, the passage of time or
a change in perception as to the potential of the underlying security, or any
combination thereof. If the market price of the underlying security is below
the exercise price set forth in the warrant on the expiration date, the war-
rant will expire worthless. Moreover, a right or warrant ceases to have value
if it is not exercised prior to the expiration date.
For a further description of the Technology Portfolio's investment policies
and techniques, see "Other Investment Policies and Techniques" below.
QUASAR PORTFOLIO
The Quasar Portfolio is a diversified investment company that seeks growth of
capital by pursuing aggressive investment policies. It invests for capital ap-
preciation and only incidentally for current income. The selection of securi-
ties based on the possibility of appreciation cannot prevent loss in value.
Moreover, because the Portfolio's investment policies are aggressive, an in-
vestment in the Portfolio is risky and investors who want assured income or
preservation of capital should not invest in the Portfolio.
The Portfolio invests in any company and industry and in any type of security
with potential for capital appreciation. It invests in well-known and estab-
lished companies and in new and unseasoned companies. When selecting securi-
ties, the Adviser considers economic and Political outlook, the values of spe-
cific securities relative to other investments, trends in the determinants of
corporate profits and management capability and practices.
The Portfolio invests principally in equity securities, but it also invests to
a limited degree in non-convertible bonds and preferred stock. The Portfolio
invests in listed and unlisted U.S. and foreign securities. The Portfolio pe-
riodically invests in special situations, which occur when the securities of a
company are expected to appreciate due to a development particularly or
uniquely applicable to that company and regardless of general business condi-
tions or movements of the market as a whole.
The Portfolio may also: (i) invest up to 15% of its total assets in securities
for which there is no ready market; (ii) make short
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sales of securities "against the box," but not more than 15% of its net assets
may be deposited on short sales; and (iii) write call options and purchase and
sell put and call options written by others. For additional information on the
use, risks and costs of the Policies and practices, see "Other Investment Poli-
cies and Techniques," below.
The Portfolio's investment objective cannot be changed without approval by the
holders of a majority of the Portfolio's outstanding voting securities, as de-
fined in the Act. Except as otherwise indicated, the investment policies of the
Portfolio are not "fundamental policies" and may, therefore, be changed by the
Board of Directors without shareholder approval.
Options. The Portfolio may write call options and purchase and sell put and
call options written by others. An option gives the purchaser of the option,
upon payment of a premium, the right to deliver to (in the case of a put) or
receive from (in the case of a call) the writer a specified amount of a secu-
rity on or before a fixed date at a predetermined price. A call option written
by the Portfolio is "covered" if the Portfolio owns the underlying security,
has an absolute and immediate right to acquire that security upon conversion or
exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than that of the call option
it has written.
In purchasing an option, the Portfolio would be in a position to realize a
gain, if, during the option period, the price of the underlying security in-
creased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid; otherwise the portfolio would experience
a loss equal to the premium paid for the option.
If a call option written by the Portfolio were exercised, the Portfolio would
be obligated to sell the underlying security at the exercise price. The risk
involved in writing an option is that, if the option were exercised, the under-
lying security would then be purchased or sold by the Portfolio at a disadvan-
tageous price. These risks could be reduced by entering into a closing transac-
tion (i.e., by disposing of the option prior to its exercise). The Portfolio
retains the premium received from writing a call option whether or not the op-
tion could result in increases in a Fund's portfolio turnover rate, especially
during periods when market prices of the underlying securities appreciate.
The Portfolio will not write a call option if, as a result, the aggregate of
the Portfolio's securities subject to outstanding call options (valued at the
lower of the option price or market value of such securities) would exceed 15%
of the Portfolio's total assets or more than 10% of the Portfolio's assets
would be committed to all options that at time of sale have a remaining term of
more than 100 days. The aggregate cost of all outstanding options purchased and
held by the Portfolio will at no time exceed 10% of the Portfolio's total
assets.
Short Sales. The Portfolio may only make short sales of securities "against the
box". A short sale is effected by selling a security that the Portfolio does
not own, or if the Portfolio does own such security, it is not to be delivered
upon consummation of the sale. A short sale is "against the box" to the
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extent that the Portfolio contemporaneously owns or has the right to obtain
securities identical to those sold short without payment. If the price of the
security sold short increases between the time of the short sale and the time
the Portfolio replaces the borrowed security, the Portfolio will incur a loss;
conversely, if the price declines, the Portfolio will realize a capital gain.
Certain special federal income tax considerations may apply to short sales en-
tered into by the Portfolio. See "Dividends, Distributions and Taxes" in the
Statement of Additional Information.
Foreign Securities. The Portfolio may invest in foreign securities. To the ex-
tent the Portfolio invests in foreign securities, consideration is given to
certain factors comprising both risk and opportunity. The values of foreign
securities investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic, taxation or mone-
tary policy (in the United States and abroad) or changed circumstances in
dealings between nations. Foreign securities markets may also be less liquid,
more volatile, and less subject to governmental supervision than in the United
States. Investments in foreign countries could be affected by other factors
not present in the United States, including expropriation, confiscatory taxa-
tion, lack of uniform accounting and auditing standards and potential diffi-
culties in enforcing contractual obligations and could be subject to extended
settlement periods.
REAL ESTATE INVESTMENT PORTFOLIO
The Real Estate Investment Portfolio's investment objective is to seek a total
return on its assets from long-term growth of capital and from income princi-
pally through investing in a portfolio of equity securities of issuers that
are primarily engaged in or related to the real estate industry.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in equity securities of real estate investment trusts ("REITs")
and other real estate industry companies. A "real estate industry company" is
a company that derives at least 50% of its gross revenues or net profits from
the ownership, development, construction, financing, management or sale of
commercial, industrial or residential real estate or interests therein. The
equity securities in which the Portfolio will invest for this purpose consist
of common stock, shares of beneficial interest of REITs and securities with
common stock characteristics, such as preferred stock or convertible securi-
ties ("Real Estate Equity Securities").
The Portfolio may invest up to 35% of its total assets in (a) securities that
directly or indirectly represent participations in, or are collateralized by
and payable from, mortgage loans secured by real property ("Mortgage-Backed
Securities"), such as mortgage pass-through certificates, real estate mortgage
investment conduit ("REMIC") certificates and collateralized mortgage obliga-
tions ("CMOs") and (b) short-term investments. These instruments are described
below. The risks associated with the Portfolio's transactions in REMICs, CMOs
and other types of mortgage-backed securities, which are considered to be de-
rivative securities, may include some or all of the following: market risk,
leverage and volatility risk, correlation risk, credit risk and liquidity and
valuation risk. See "Certain Risk Considerations --
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Mortgage-Backed Securities" below for a description of these and other risks.
As to any investment in Real Estate Equity Securities, the Adviser's analysis
will focus on determining the degree to which the company involved can achieve
sustainable growth in cash flow and dividend paying capability. The Adviser
believes that the primary determinant of this capability is the economic via-
bility of property markets in which the company operates and that the second-
ary determinant of this capability is the ability of management to add value
through strategic focus and operating expertise. The Portfolio will purchase
Real Estate Equity Securities when, in the judgment of the Adviser, their mar-
ket price does not adequately reflect this potential. In making this determi-
nation, the Adviser will take into account fundamental trends in underlying
property markets as determined by proprietary models, site visits conducted by
individuals knowledgeable in local real estate markets, price-earnings ratios
(as defined for real estate companies), cash flow growth and stability, the
relationship between asset value and market price of the securities, dividend
payment history, and such other factors which the Adviser may determine from
time to time to be relevant. The Adviser will attempt to purchase for the
Portfolio Real Estate Equity Securities of companies whose underlying portfo-
lios are diversified geographically and by property type.
The Portfolio may invest without limitation in shares of REITs. REITs are
pooled investment vehicles which invest primarily in income producing real es-
tate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Similar to invest-
ment companies such as the Portfolio, REITs are not taxed on income distrib-
uted to shareholders provided they comply with several requirements of the In-
ternal Revenue Code of 1986, as amended ("the Code"). The Portfolio will indi-
rectly bear its proportionate share of expenses incurred by REITs in which the
Portfolio invests in addition to the expenses incurred directly by the
Portfolio.
Investment Process for Real Estate Equity Securities. The Portfolio's invest-
ment strategy with respect to Real Estate Equity Securities is based on the
premise that property market fundamentals are the primary determinant of
growth underlying the success of Real Estate Equity Securities. Value added
management will further distinguish the most attractive Real Estate Equity Se-
curities. The Portfolio's research and investment process is designed to iden-
tify those companies with strong property fundamentals and strong management
teams. This process is comprised of real estate market research, specific
property inspection and securities analysis.
The universe of property-owning real estate industry firms consists of approx-
imately 115 companies of sufficient size and quality to merit consideration
for investment by the Portfolio. In implementing the Portfolio's research and
investment process, the Ad-
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viser will avail itself of the consulting services of Koll Investment Manage-
ment, a division of Koll Real Estate Services ("Koll"), a national real estate
investment and property manager that oversees a 1,000 property portfolio. As
consultant to the Adviser, Koll provides access to a proprietary model (Koll's
National Real Estate Index) that analyzes the approximately 9,000 properties
owned by these companies. Using proprietary databases and algorithms, Koll ana-
lyzes local market rent, expense and occupancy trends, market specific transac-
tion pricing, demographic and economic trends, and leading indicators of real
estate supply such as building permits. Over 300 asset-type specific geographic
markets are analyzed and ranked on a relative scale by Koll in compiling its
REIT . Score database. The relative attractiveness of these real estate indus-
try companies is similarly ranked based on the composite rankings of the prop-
erties they own. See "Management of the Fund" for more information about Koll.
Once the universe of real estate industry companies has been distilled through
the market research process, Koll's local market presence provides the capabil-
ity to perform site specific inspections of key properties. This analysis exam-
ines specific property location, condition, and sub-market trends. Koll's use
of locally based real estate professionals provides the Adviser with a window
on the operations of the portfolio companies as information gathered can imme-
diately be put in the context of local market events. Only those companies
whose specific property portfolios reflect the promise of their general markets
will be considered for initial and continued investment by the Portfolio.
The Adviser further screens the universe of real estate industry companies by
using rigorous financial models and by engaging in regular contact with manage-
ment of targeted companies. Each management's strategic plan and ability to ex-
ecute the plan are determined and analyzed. The Adviser will make extensive use
of Koll's network of industry analysts in order to assess trends in tenant in-
dustries. This information is then used to further interpret management's stra-
tegic plans. Financial ratio analysis is used to isolate those companies with
the ability to make value-added acquisitions. This information is combined with
property market trends and used to project future earnings potential.
The Adviser believes that this process will result in a portfolio that will
consist of Real Estate Equity Securities of companies that own assets in the
most desirable markets across the country, diversified geographically and by
property type.
Mortgage-Backed Securities and Associated Risks. Mortgage-Backed Securities in-
clude mortgage pass-through certificates and multiple-class pass-through secu-
rities, such as REMIC pass-through certificates, CMOs and stripped mortgage-
backed securities ("SMBS"), and other types of Mortgage-Backed Securities that
may be available in the future.
Guaranteed Mortgage Pass-Through Securities. The Portfolio may invest in guar-
anteed mortgage pass-through securities which represent participation interests
in pools of residential mortgage loans and are issued by U.S. governmental or
private lenders and guaranteed by the U.S. Government or one of its agencies or
instrumentalities, including but not limited to the Govern-
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ment National Mortgage Association ("Ginnie Mae"), the Federal National Mort-
gage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"). Ginnie Mae certificates are guaranteed by the full faith and
credit of the United States Government for timely payment of principal and in-
terest on the certificates. Fannie Mae certificates are guaranteed by Fannie
Mae, a federally chartered and privately-owned corporation for full and timely
payment of principal and interest on the certificates. Freddie Mac certifi-
cates are guaranteed by Freddie Mac, a corporate instrumentality of the United
States Government, for timely payment of interest and the ultimate collection
of all principal of the related mortgage loans.
Multiple-Class Pass-Through Securities and Collateralized Mortgage Obliga-
tions. Mortgage-Backed Securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, U.S. Govern-
ment agencies and instrumentalities as well as private lenders. CMOs and REMIC
certificates are issued multiple classes and the principal of and interest on
the mortgage assets may be allocated among the several classes of CMOs or
REMIC certificates in various ways. Each class of CMOs or REMIC certificates,
often referred to as a "tranche," is issued at a specific adjustable or fixed
interest rate and must be fully retired no later than its final distribution
date. Generally, interest is paid or accrues on all classes of CMOs or REMIC
certificates on a monthly basis. The Portfolio will not invest in the lowest
tranche of CMOs and REMIC certificates.
Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided
from payments of principal and interest on collateral of mortgaged assets and
any reinvestment income thereon.
A REMIC is a CMO that qualifies for special tax treatment under the Code and
invests in certain mortgages primarily secured by interests in real property
and other permitted investments. Investors may purchase "regular" and "residu-
al" interest shares of beneficial interest in REMIC trusts although the Port-
folio does not intend to invest in residual interests.
Risks. Investing in Mortgage-Backed Securities involves certain unique risks
in addition to those generally associated with investing in the real estate
industry in general. These unique risks include the failure of a counterparty
to meet its commitments, adverse interest rate changes and the effects of pre-
payments on mortgage cash flows. See "Certain Risk Considerations" below for a
more complete description of the characteristics of Mortgage-Backed Securities
and associated risks.
Short-Term Investments. The short-term investments in which the Portfolio may
invest are: corporate commercial paper and other short-term commercial obliga-
tions, in each case rated or issued by companies with similar securities out-
standing that are rated Prime-1, Aa or better by Moody's Investors Service,
Inc. ("Moody's") or A-1, AA or better by Standard & Poor's Ratings Services
("S&P"); obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks with securities outstanding that
are rated Prime-1,
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Aa or better by Moody's or A-1, AA or better by S&P; and obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities with
remaining maturities not exceeding 18 months.
The Portfolio may invest in debt securities rated BBB or higher by S&P or Baa
or higher by Moody's or, if not so rated, of equivalent credit quality as de-
termined by the Adviser. Securities rated BBB by S&P or Baa by Moody's are
considered to have speculative characteristics. Sustained periods of deterio-
rating economic conditions or rising interest rates are more likely to lead to
a weakening in the issuer's capacity to pay interest and repay principal than
in the case of higher-rated securities. The Portfolio expects that it will not
retain a debt security which is downgraded below BBB or Baa or, if unrated,
determined by the Adviser to have undergone similar credit quality deteriora-
tion, subsequent to purchase by the Portfolio.
The Portfolio may also engage in the following investment practices to the ex-
tent indicated: (i) invest up to 10% of its net assets in rights or warrants;
(ii) invest up to 15% of its net assets in the convertible securities of com-
panies whose common stocks are eligible for purchase by the Portfolio; (iii)
lend portfolio securities on a short or long term basis equal in value to not
more than 25% of total assets; (iv) enter into repurchase agreements of up to
seven days' duration; (v) enter into forward commitment transactions as long
as the Portfolio's aggregate commitments under such transactions are not more
than 30% of the Portfolio's total assets; (vi) enter into standby commitment
agreements; (vii) make short sales of securities or maintain a short position
but only if at all times when a short position is open not more than 25% of
the Portfolio's net assets (taken at market value) is held as collateral or
placed in a segregated account for such sales; and (viii) invest in illiquid
securities unless, as a result, more than 15% of its net assets would be so
invested.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
Convertible Securities. Prior to conversion, convertible securities have the
same general characteristics as non-convertible debt securities, which provide
a stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible security
will normally vary with changes in the price of the underlying stock, although
the higher yield tends to make the convertible security less volatile than the
underlying common stock. As with debt securities, the market value of convert-
ible securities tends to decline as interest rates increase and increase as
interest rates decline. While convertible securities generally offer lower in-
terest or dividend yields than non-convertible debt securities of similar
quality, they enable investors to benefit from increases in the market price
of the underlying common stock.
Rights and Warrants. The Portfolio will invest in rights or warrants only if
the underlying equity securities are themselves deemed appropriate by the Ad-
viser for inclusion in the Portfolio's portfolio. Rights and warrants entitle
the holder to buy equity securities at a specific price for a specific period
of time. Rights are similar to warrants except that they have a substantially
shorter duration. Rights and warrants may be consid-
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ered more speculative than certain other types of investments in that they do
not entitle a holder to dividends or voting rights with respect to the under-
lying securities nor do they represent any rights in the assets of the issuing
company. The value of a right or warrant does not necessarily change with the
value of the underlying security, although the value of a right or warrant may
decline because of a decrease in the value of the underlying security, the
passage of time or a change in perception as to the potential of the under-
lying security, or any combination thereof. If the market price of the under-
lying security is below the exercise price set forth in the warrant on the ex-
piration date, the warrant will expire worthless.
Short Sales. A short sale is a transaction in which the Portfolio sells a se-
curity it does not own but has borrowed in anticipation that the market price
of that security will decline. When the Portfolio makes a short sale of a se-
curity that it does not own, it must borrow from a broker-dealer the security
sold short and deliver the security to the broker-dealer upon conclusion of
the short sale. The Portfolio may be required to pay a fee to borrow particu-
lar securities and is often obligated to pay over any payments received on
such borrowed securities. The Portfolio's obligation to replace the borrowed
security will be secured by collateral deposited with a broker-dealer quali-
fied as a custodian and will consist of cash or securities. Depending on the
arrangements the Portfolio makes with the broker-dealer from which it borrowed
the security regarding remittance of any payments received by the Portfolio on
such security, the Portfolio may not receive any payments (including interest)
on its collateral deposited with the broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolio replaces the borrowed security, the
Portfolio will incur a loss; conversely, if the price declines, the Portfolio
will realize a short-term capital gain. Any gain will be decreased, and any
loss increased, by the transaction costs described above. Although the Portfo-
lio's gain is limited to the price at which it sold the security short, its
potential loss is theoretically unlimited. In order to defer realization of
gain or loss for U.S. federal income tax purposes, the Portfolio may also make
short sales "against the box." In this type of short sale, at the time of the
sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire at no additional cost the identical security.
The Portfolio may not make a short sale unless at all times when a short posi-
tion is open not more than 25% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time. Certain special
federal income tax considerations may apply to short sales entered into by the
Portfolio. See "Dividends, Distributions and Taxes."
CERTAIN RISK CONSIDERATIONS
Risk Factors Associated with the Real Estate Industry. Although the Portfolio
does not invest directly in real estate, it does invest primarily in Real Es-
tate Equity Securities and does have a policy of concentration of its invest-
ments in the real estate industry. Therefore, an investment in the Portfolio
is subject to certain risks associated with the direct ownership of real es-
tate and with the real estate industry in general. These risks include, among
others: possible declines in
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the value of real estate; risks related to general and local economic condi-
tions; possible lack of availability of mortgage funds; overbuilding; extended
vacancies of properties; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and li-
ability to third parties for damages resulting from, environmental problems;
casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents; and changes in
interest rates. To the extent that assets underlying the Portfolio's invest-
ments are concentrated geographically, by property type or in certain other re-
spects, the Portfolio may be subject to certain of the foregoing risks to
greater extent.
In addition, if the Portfolio receives rental income or income from the dispo-
sition of real property acquired as a result of a default on securities the
Portfolio owns, the receipt of such income may adversely affect the Portfolio's
ability to retain its tax status as a regulated investment company. See "Divi-
dends, Distributions and Taxes." Investments by the Portfolio in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancings and their impact on servicing rights.
REITS. Investing in REITs involves certain unique risks in addition to those
risks associated with investing in the real estate industry in general. Equity
REITs may be affected by changes in the value of the underlying property owned
by the REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs may be affected by the quality of any credit extended. REITs
are dependent upon management skills, are not diversified, are subject to heavy
cash flow dependency, default by borrowers and self-liquidation. REITs are also
subject to the possibilities of failing to qualify for tax free pass-through of
income under the Code and failing to maintain their exemptions from registra-
tion under the Act.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate obliga-
tions can be expected to rise. Conversely, when interest rates rise, the value
of a REIT's investment in fixed rate obligations can be expected to decline. In
contrast, as interest rates on adjustable rate mortgage loans are reset period-
ically, yields on a REIT's investments in such loans will gradually align them-
selves to reflect changes in market interest rates, causing the value of such
investments to fluctuate less dramatically in response to interest rate fluctu-
ations than would investments in fixed rate obligations.
Investing in REITs involves risks similar to those associated with investing in
small capitalization companies. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements than larger company securities. Historically, small
capitalization stocks, such as REITs, have been more volatile in price than the
larger capitalization stocks included in the S&P Index of 500 Common Stocks.
Mortgage-Backed Securities. As discussed above, investing in Mortgage-Backed
Securities involves certain unique risks in addition
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to those risks associated with investment in
the real estate industry in general. These risks include the failure of a
counterparty to meet its commitments, adverse interest rate changes and the ef-
fects of prepayments on mortgage cash flows. When interest rates decline, the
value of an investment in fixed rate obligations can be expected to rise. Con-
versely, when interest rates rise, the value of an investment in fixed rate ob-
ligations can be expected to decline. In contrast, as interest rates on adjust-
able rate mortgage loans are reset periodically, yields on investments in such
loans will gradually align themselves to reflect changes in market interest
rates, causing the value of such investments to fluctuate less dramatically in
response to interest rate fluctuations than would investments in fixed rate ob-
ligations.
Further, the yield characteristics of Mortgage-Backed Securities, such as those
in which the Portfolio may invest, differ from those of traditional fixed in-
come securities. The major differences typically include more frequent interest
and principal payments (usually monthly), the adjustability of interest rates,
and the possibility that prepayments of principal may be made substantially
earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a va-
riety of economic, geographic, social and other factors, and cannot be pre-
dicted with certainty. Both adjustable rate mortgage loans and fixed rate mort-
gage loans may be subject to a greater rate of principal prepayments in a de-
clining interest rate environment and to a lesser rate of principal prepayments
in an increasing interest rate environment. Early payment associated with Mort-
gage-Backed Securities causes these securities to experience significantly
greater price and yield volatility than that experienced by traditional fixed-
income securities. Under certain interest rate and prepayment rate scenarios,
the Portfolio may fail to recoup fully its investment in Mortgage-Backed Secu-
rities notwithstanding any direct or indirect governmental or agency guarantee.
When the Portfolio reinvests amounts representing payments and unscheduled pre-
payments of principal, it may receive a rate of interest that is lower than the
rate on existing adjustable rate mortgage pass-through securities. Thus, Mort-
gage-Backed Securities, and adjustable rate mortgage pass-through securities in
particular, may be less effective than other types of U.S. Government securi-
ties as a means of "locking in" interest rates.
Securities Ratings. The ratings of securities by S&P, Moody's, Duff & Phelps
Credit Rating Co. ("Duff & Phelps") and Fitch Investors Service, Inc. ("Fitch")
are a generally accepted barometer of credit risk. They are, however, subject
to certain limitations from an investor's standpoint. The rating of an issuer
is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may be varying de-
grees of difference in credit risk of securities within each rating category.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Except as otherwise noted below, the following description of other investment
policies is applicable to all of the Fund's Portfolios:
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REPURCHASE AGREEMENTS
Any Portfolio, except the Total Return Portfolio, Technology Portfolio and the
Quasar Portfolio may enter into agreements pertaining to U.S. Government Secu-
rities or, in the case of the North American Government Income Portfolio, the
Global Dollar Government Portfolio, the Utility Income Portfolio, the Conser-
vative Investors Portfolio, the Growth Investors Portfolio and the Growth
Portfolio, pertaining to the types of securities in which it invests, with
member banks of the Federal Reserve System or "primary dealers" (as designated
by the Federal Reserve Bank of New York) and, in the case of the Money Market
Portfolio, with State Street Bank and Trust Company, the Fund's Custodian, in
such securities. The Real Estate Investment Portfolio may enter into repur-
chase agreements pertaining to U.S. Government Securities with member banks of
the Federal Reserve System or primary dealers. There is no percentage restric-
tion on the ability of the Global Dollar Government Portfolio, the North Amer-
ican Government Income Portfolio, the Utility Income Portfolio, the Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio to enter into
repurchase agreements. The North American Government Income Portfolio, the
Utility Income Portfolio and the Real Estate Investment Portfolio currently
intend to enter into repurchase agreements only with the Fund's Custodian and
such primary dealers.
A repurchase agreement arises when a buyer purchases a security and simultane-
ously agrees to resell it to the vendor at an agreed-upon future date, nor-
mally one day or a few days later. The resale price is greater than the pur-
chase price, reflecting an agreed-upon interest rate. Such agreements permit
the Portfolio to keep all of its assets at work while retaining "overnight"
flexibility in pursuit of investment of a longer-term nature. Each Portfolio
requires continual maintenance for its account in the Federal Reserve/Treasury
Book Entry System of collateral in an amount equal to, or in excess of, the
resale price. In the event a vendor defaulted on its repurchase obligation,
the Portfolio might suffer a loss to the extent that the proceeds from the
sale of the collateral were less than the repurchase price. In the event of a
vendor's bankruptcy, the Portfolio might be delayed in, or prevented from,
selling the collateral for its benefit. The Fund's Board of Directors has es-
tablished procedures, which are periodically reviewed by the Board, pursuant
to which the Adviser monitors the creditworthiness of the dealers with which
the Portfolios enter into repurchase agreement transactions.
WRITING COVERED CALL OPTIONS
The Premier Growth Portfolio, the Growth and Income Portfolio, the U.S.
Government/High Grade Securities Portfolio, the High-Yield Portfolio and the
Total Return Portfolio may each write covered call options listed on one or
more national securities exchanges. A call option gives the purchaser of the
option, upon payment of a premium to the writer of the option, the right to
purchase from the writer of the option a specified number of shares of a spec-
ified security on or before a fixed date, at a predetermined price. A Portfo-
lio permitted to write call options may not do so unless the Portfolio at all
times during the option period owns the optioned securities, or securities
convertible or carrying rights to ac-
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quire the optioned securities at no additional cost. None of the above listed
Portfolios may write covered call options in excess of 25% of such Portfolio's
assets.
A Portfolio may terminate its obligation to the holder of an option written by
the Portfolio through a "closing purchase transaction." The Portfolio may not,
however, effect a closing purchase transaction with respect to such an option
after it has been notified of the exercise of such option. The Portfolio real-
izes a profit or loss from a closing purchase transaction if the cost of the
transaction is more or less than the premium received by the Portfolio from
writing the option. Although the writing of covered call options only on na-
tional securities exchanges increases the likelihood of a Portfolio being able
to make closing purchase transactions, there is no assurance that a Portfolio
will be able to effect closing purchase transactions at any particular time or
at an acceptable price. The writing of covered call options could result in in-
creases in the portfolio turnover of a Portfolio, especially during periods
when market prices of the underlying securities appreciate.
OPTIONS
In an effort to increase current income and to reduce fluctuations in net asset
value, the North American Government Income Portfolio, the Global Dollar Gov-
ernment Portfolio, the Utility Income Portfolio, and the Worldwide
Privatization Portfolios each intend to write covered put and call options and
purchase put and call options on securities of the types in which it is permit-
ted to invest that are traded on U.S. and foreign securities exchanges. Each
Portfolio also intends to write call options for cross-hedging purposes. There
are no specific limitations on a Portfolio's writing and purchasing of options.
The purchaser of an option, upon payment of a premium, obtains, in the case of
a put option the right to deliver to the writer of the option, and in the case
of a call option, the right to call upon the writer to deliver, a specified
amount of a security on or before a fixed date at a predetermined price. A call
option written by a Portfolio is "covered" if the Portfolio (i) owns the under-
lying security covered by the call (ii) has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by the Fund's Custodian) upon
conversion or exchange of other portfolio securities, or (iii) holds a call on
the same security in the same principal amount as the call written where the
exercise price of the call held (i) is equal to or less than the exercise price
of the call written or (ii) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash and liquid
high-grade debt securities in a segregated account with the Fund's Custodian. A
put option written by a Portfolio is "covered" if the Portfolio maintains liq-
uid assets with a value equal to the exercise price in a segregated account
with the Fund's Custodian, or else holds a put on the same security in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written. The premium
paid by the purchaser of an option will reflect, among other things, the rela-
tionship of the exercise price to the market price and volatility of the under-
lying security, the remain -
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ing term of the option, supply and demand and interest rates.
A call option is written for cross-hedging purposes if a Portfolio does not
own the underlying security, but seeks to provide a hedge against a decline in
value in another security which the Portfolio owns or has the right to ac-
quire. In such circumstances, the Portfolio collateralizes its obligation un-
der the option (which is not covered) by maintaining in a segregated account
with the Fund's Custodian liquid assets in an amount not less than the market
value of the underlying security, marked to market daily.
In purchasing a call option, a Portfolio would be in a position to realize a
gain if, during the option period, the price of the underlying security in-
creased by an amount in excess of the premium paid. It would realize a loss if
the price of the underlying security declined or remained the same or did not
increase during the period by more than the amount of the premium. In purchas-
ing a put option, a Portfolio would be in a position to realize a gain if,
during the option period, the price of the underlying security declined by an
amount in excess of the premium paid. It would realize a loss if the price of
the underlying security increased or remained the same or did not decrease
during that period by more than the amount of the premium. If a put or call
option purchased by a Portfolio were permitted to expire without being sold or
exercised, its premium would be lost by the Portfolio.
The risk involved in writing a put option is that there could be a decrease in
the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the op-
tion holder to the Portfolio at a higher price than its current market value.
The risk involved in writing a call option is that there could be an increase
in the market value of the underlying security. If this occurred, the option
could be exercised and the underlying security would then be sold by the Port-
folio at a lower price than its current market value. These risks could be re-
duced by entering into a closing transaction. See Appendix D to the Statement
of Additional Information. A Portfolio retains the premium received from writ-
ing a put or call option whether or not the option is exercised.
A Portfolio may purchase or write options on securities of the types in which
it is permitted to invest in privately negotiated transactions. A Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions)
deemed creditworthy by the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options purchased or written
by a Portfolio in negotiated transactions are illiquid and it may not be pos-
sible for the Portfolio to effect a closing transaction at a time when the Ad-
viser believes it would be advantageous to do so. See "Illiquid Securities."
See Appendix D to the Statement of Additional Information for a further dis-
cussion of the use, risks and costs of option trading.
Each of the Global Dollar Government Portfolio, the Utility Income Portfolio
and the Worldwide Privatization Portfolio may purchase and sell exchange-
traded options on any securities index composed of the types
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of securities in which it may invest. An option on a securities index is simi-
lar to an option on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the chosen index is greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. There are no specific limitations on either Portfolio's purchasing
and selling of options on securities indices.
LOANS OF PORTFOLIO SECURITIES
Each Portfolio of the Fund, except the Money Market Portfolio and the Quasar
Portfolio, may make secured loans of its portfolio securities to brokers,
dealers and financial institutions provided that cash, U.S. Government securi-
ties, other liquid high-quality debt securities or bank letters of credit
equal to at least 100% of the market value of the securities loaned is depos-
ited and maintained by the borrower with the Portfolio.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities to a particular borrow-
er, the Adviser (subject to review by the Directors) will consider all rele-
vant facts and circumstances, including the creditworthiness of the borrower.
While securities are on loan, the borrower will pay the Portfolio any income
earned thereon and the Portfolio may invest any cash collateral in portfolio
securities, thereby earning additional income, or receive an agreed upon
amount of income from a borrower who has delivered equivalent collateral. Each
Portfolio will have the right to regain record ownership of loaned securities
to exercise beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. Each Portfolio may pay
reasonable finders', administrative and custodial fees in connection with a
loan. The Directors will monitor the lending of securities by each Portfolio.
No more than 30% of the value of the assets (25% in the case of the Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio and 20% in
the case of the Short-Term Multi-Market Portfolio, the Global Bond Portfolio,
the North American Government Income Portfolio and the Utility Income Portfo-
lio) of each Portfolio may be loaned at any time, nor will a Portfolio lend
its portfolio securities to any officer, director, employee or affiliate of
either the Fund or the Adviser.
FOREIGN SECURITIES
For a description of the investment policies of the Short-Term Multi-Market
Portfolio, the Global Bond Portfolio, the North American Government Income
Portfolio, the Global Dollar Government Portfolio, the Utility Income Portfo-
lio, the Worldwide Privatization Portfolio and the Quasar Portfolio with re-
spect to foreign securities, see above. Each of the other Portfolios, except
the U.S. Government/High Grade Securities Portfolio and the Real Estate In-
vestment Portfolio, may invest in listed and unlisted foreign securities sub-
ject to the limitation that the International Portfolio may invest only in the
securities of foreign issuers or U.S. companies having their principal
activities and interests outside the United States. The other Portfolios of
the Fund may
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invest in foreign securities without limitation, although the Total Return
Portfolio has no intention of so investing in the future, the Premier Growth
Portfolio intends to invest at least 85% of the value of its total assets in
the equity securities of American companies, the Growth and Income Portfolio
intends to restrict its investment in foreign securities to issues of high
quality and the Money Market Portfolio is limited to investing in those for-
eign securities described above in "Investment Objectives and Policies --
Money Market Portfolio." The Technology Portfolio will not purchase a foreign
security if such purchase at the time thereof would cause 10% or more of the
value of that Portfolio's total assets to be invested in foreign securities.
The High Yield Portfolio may purchase foreign securities, provided the value
of issues denominated in foreign currency shall not exceed 20% of the Portfo-
lio's total assets and the value of issues denominated in United States cur-
rency shall not exceed 25% of the Portfolio's total assets. The Portfolios may
convert U.S. Dollars into foreign currency, but only to effect securities
transactions on a foreign securities exchange and not to hold such currency as
an investment. Each Portfolio, except the Technology Portfolio and the U.S.
Government/High Grade Securities Portfolio, may enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the
level of future foreign exchange rates.
To the extent a Portfolio, including the Short-Term Multi-Market Portfolio,
the Global Bond Portfolio, the North American Government Income Portfolio, the
Global Dollar Government Portfolio, the Utility Income Portfolio and the
Worldwide Privatization Portfolio, invests in foreign securities, considera-
tion is given to certain factors comprising both risk and opportunity. The
values of foreign securities investments are affected by changes in currency
rates or exchange control regulations, application of foreign tax laws, in-
cluding withholding taxes, changes in governmental administration or economic,
taxation or monetary policy (in the United States and abroad) or changed cir-
cumstances in dealings between nations. Currency exchange rate movements will
increase or reduce the U.S. dollar value of the Portfolio's net assets and in-
come attributable to foreign securities. Costs are incurred in connection with
conversions between various currencies held by a Portfolio. In addition, there
may be substantially less publicly available information about foreign issuers
than about domestic issuers, and foreign issuers may not be subject to ac-
counting, auditing and financial reporting standards and requirements compara-
ble to those of domestic issuers. Foreign issuers are subject to accounting,
auditing and financial standards and requirements that differ, in some cases
significantly, from those applicable to U.S. issuers. In particular, the as-
sets and profits appearing on the financial statements of a foreign issuer may
not reflect its financial position or results of operations in the way they
would be reflected had the financial statements been prepared in accordance
with U.S. generally accepted accounting principles. In addition, for an issuer
that keeps accounting records in local currency, inflation accounting rules in
some of the countries in which a Portfolio will invest require, for both tax
and accounting purposes, that certain assets and liabilities be restated on
the issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation ac-
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counting may indirectly generate losses or profits. Consequently, financial
data may be materially affected by restatements for inflation and may not ac-
curately reflect the real condition of those issuers and securities markets.
Securities of some foreign issuers are less liquid and more volatile than se-
curities of comparable domestic issuers, and foreign brokerage commissions are
generally higher than in the United States. Foreign securities markets may
also be less liquid, more volatile, and less subject to governmental
supervision than in the United States. Investments in foreign countries could
be affected by other factors not present in the United States, including ex-
propriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods.
Investment in Japanese Issuers. Investment in securities of Japanese issuers
involves certain considerations not present with investment in securities of
U.S. issuers. As with any investment not denominated in the U.S. Dollar, the
U.S. Dollar value of each Portfolio's investments denominated in the Japanese
Yen will fluctuate with Yen-Dollar exchange rate movements. Between 1985 and
1995, the Japanese Yen generally appreciated against the U.S. Dollar. On April
19, 1995, the Japanese Yen reached an all time high of 79.75 against the U.S.
Dollar. Since its peak of April 19, 1995, the Japanese Yen has decreased in
value against the U.S. Dollar. On April 15, 1997, the exchange rate was 126.3
Yen per Dollar.
Japan's largest stock exchange is the Tokyo Stock Exchange, the First Section
of which is reserved for larger, established companies. As measured by the
TOPIX, a capitalization-weighted composite index of all common stocks listed
in the First Section, the performance of the First Section reached a peak in
1989. Thereafter, the TOPIX declined approximately 45% through December 29,
1995. On December 30, 1996 the TOPIX closed down approximately 7% from the end
of 1995. On January 31, 1997 the TOPIX closed down approximately 7% from the
end of 1996, after falling approximately 10% during the first full week of
1997. On April 16, 1997, the TOPIX closed down approximately 2% from January
31, 1997.
Certain valuation measures, such as price-to-book value and price-to-cash flow
ratios, indicate that the Japanese stock market is near its lowest level in
the last twenty years relative to other world markets. The average price-
/earnings ratio of Japanese companies, however, are high in comparison with
other major stock markets.
In recent years, Japan has consistently recorded large current account trade
surpluses with the U.S. that have caused difficulties in the relations between
the two countries. On October 1, 1994, the U.S. and Japan reached an agreement
that may lead to more open Japanese markets with respect to trade in certain
goods and services. In June, 1995, the two countries agreed in principle to
increase Japanese imports of American automobiles and automotive parts. Never-
theless, it is expected that the continuing friction between the U.S. and Ja-
pan with respect to trade issues will thus continue for the foreseeable fu-
ture.
Each Portfolio's investments in Japanese issuers also will be subject to un-
certainty resulting from the instability of recent Japanese ruling coalitions.
From 1955 to 1993, Japan's government was controlled by a single political
party. Between August 1993,
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and October 1996 Japan was ruled by a series of four coalition governments. As
a result of a general election on October 20, 1996, however, Japan returned to
a single party government led by Prime Minister Ryutaro Hashimoto. Mr.
Hashimoto's party, however, does not control a majority of the seats in the
parliament. For further information regarding Japan, see the Fund's Statement
of Additional Information.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Total Return Portfolio, the U.S. Government/High Grade Securities Portfo-
lio, the High-Yield Portfolio, the North American Government Income Portfolio,
the Global Dollar Government Portfolio, the Utility Income Portfolio, the
Worldwide Privatization Portfolio and the Real Estate Investment Portfolio may
enter into forward commitments for the purchase or sale of securities. Such
transactions may include purchases on a "when-issued" basis or purchases or
sales on a "delayed delivery" basis. In some cases, a forward commitment may be
conditioned upon the occurrence of a subsequent event, such as approval and
consummation of a debt restructuring (i.e., a "when, as and if issued" trade).
When forward commitment transactions are negotiated, the price, which generally
is expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date, normally
within two months after the transaction, delayed settlements beyond two months
may be negotiated. To the extent a Portfolio sells (i.e., writes) caps and
floors it will maintain in a segregated account with the Fund's Custodian liq-
uid assets having an aggregate net asset value at least equal to the full
amount accrued daily of the portfolio's obligations with respect to any caps
and floors. Securities purchased or sold under a forward commitment are subject
to market fluctuation, and no interest accrues to the purchaser prior to the
settlement date. At the time a Portfolio enters into a forward commitment, it
will record the transaction and thereafter reflect the value of the security
purchased or, if a sale, the proceeds to be received, in determining its net
asset value. Any unrealized appreciation or depreciation reflected in such val-
uation of a "when, as and if issued" security would be cancelled in the event
that the required condition did not occur and the trade was cancelled.
The use of forward commitments enables a Portfolio to protect against antici-
pated changes in interest rates and prices. How- ever, if the Adviser were to
forecast incorrectly the direction of interest rate movements, the Portfolio
might be required to complete such when-issued or forward transactions at
prices less favorable than current market values. No forward commitments will
be made by a Portfolio if, as a result, the Portfolio's aggregate commitments
under such transactions would be more than 30% of the then current value of the
Portfolio's total assets, or, in the case of the Total Return Portfolio and the
High Yield Portfolio, more than 20% of the then current value of such Portfo-
lio's total assets.
A Portfolio's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date, but the Portfolio will enter into
forward commitments only with the intention of actually re-
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ceiving or delivering the securities, as the case may be. If the Portfolio,
however, chooses to dispose of the right to receive or deliver a security sub-
ject to a forward commitment prior to the settlement date of the transaction,
it may incur a gain or loss. In the event the other party to a forward commit-
ment transaction were to default, the Portfolio might lose the opportunity to
invest money at favorable rates or to dispose of securities at favorable pric-
es.
STANDBY COMMITMENT AGREEMENTS
The Global Dollar Government Portfolio, Utility Income Portfolio, Worldwide
Privatization Portfolio and the Real Estate Investment Portfolio may from time
to time enter into standby commitment agreements. Such agreements commit a
Portfolio, for a stated period of time, to purchase a stated amount of a secu-
rity which may be issued and sold to the Portfolio at the option of the issuer.
The price and coupon of the security are fixed at the time of the commitment.
At the time of entering into the agreement the Portfolio is paid a commitment
fee, regardless of whether or not the security ultimately is issued, which is
typically approximately 0.5% of the aggregate purchase price of the security
which the Portfolio has committed to purchase. Each Portfolio will enter into
such agreements only for the purpose of investing in the security underlying
the commitment at a yield and price which are considered advantageous to the
Portfolio and which are unavailable on a firm commitment basis. Except for the
Real Estate Investment Portfolio, none of the Portfolios will enter into a
standby commitment with a remaining term in excess of 45 days. Each Portfolio
will limit its investment in such commitments so that the aggregate purchase
price of the securities subject to the commitments will not exceed 50%, in the
cases of the Global Dollar Government Portfolio and the Worldwide Privatization
Portfolio, 25% in the case of the Real Estate Investment Portfolio, and 20%, in
the case of the Utility Income Portfolio, of their respective assets taken at
the time of acquisition of such commitment. The Portfolios will at all times
maintain a segregated account with the Fund's custodian of liquid assets in an
aggregate amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, a Portfolio will bear
the risk of capital loss in the event the value of the security declines and
may not benefit from an appreciation in the value of the security during the
commitment period if the issuer decides not to issue and sell the security to
the Portfolio.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued and the value of the security will thereaf-
ter be reflected in the calculation of the Portfolio's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be re-
corded as income on the expiration date of the standby commitment.
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HEDGING TECHNIQUES
The following hedging techniques are utilized by the Short-Term Multi-Market
Portfolio, the Global Bond Portfolio, the North American Government Income
Portfolio and the Utility Income Portfolio. In addition, (High-Yield Portfolio
may utilize futures contracts and options on futures contracts subject to the
restrictions disclosed above with respect to the Portfolio), the Worldwide
Privatization Portfolio may utilize futures contracts and options on futures
contracts, options on foreign currencies and forward foreign currency exchange
contracts, and the Global Dollar Government Portfolio may utilize interest
rate transactions.
Cross Hedges. The attractive returns currently available from foreign currency
denominated debt instruments can be adversely affected by changes in exchange
rates. The Adviser believes that the use of foreign currency hedging tech-
niques, including "cross-hedges" (see "Forward Foreign Currency Exchange Con-
tracts," below), can help protect against declines in the U.S. Dollar value of
income available for distribution to shareholders and declines in the net as-
set value of a Portfolio's shares resulting from adverse changes in currency
exchange rates. For example, the return available from securities denominated
in a particular foreign currency would diminish in the event the value of the
U.S. Dollar increased against such currency. Such a decline could be partially
or completely offset by an increase in value of a cross-hedge involving a for-
ward exchange contract to sell a different foreign currency, where such con-
tract is available on terms more advantageous to a Portfolio than a contract
to sell the currency in which the position being hedged is denominated. It is
the Adviser's belief that cross-hedges can therefore provide significant pro-
tection of net asset value in the event of a general rise in the U.S. Dollar
against foreign currencies. However, a cross-hedge cannot protect against ex-
change rate risks perfectly, and if the Adviser is incorrect in its judgment
of future exchange rate relationships, a Portfolio could be in a less advanta-
geous position than if such a hedge had not been established.
Indexed Debt Securities. The Portfolios may invest without limitation in debt
instruments that are indexed to certain specific foreign currency exchange
rates. The terms of such securities provide that their principal amount is ad-
justed upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. The Portfolio will purchase such debt instruments with the cur-
rency in which they are denominated and, at maturity, will receive interest
and principal payments thereon in that currency, but the amount of principal
payable by the issuer at maturity will change in proportion to the change (if
any) in the exchange rate between the two specified currencies between the
date the instrument is issued and the date the instrument matures. While such
securities entail the risk of loss of principal, the potential for realizing
gains as a result of changes in foreign currency exchange rates enables the
Portfolio to hedge (or cross-hedge) against a decline in the U.S. Dollar value
of investments denominated in foreign currencies while providing an attractive
money market rate of return. The Portfolio will purchase such debt instruments
for hedging purposes only, not for speculation. The staff of the Securities
and Exchange Commission (the
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"Commission") is currently considering whether the Portfolio's purchase of
this type of security would result in the issuance of a "senior security"
within the meaning of the Act. The Portfolio believes that such investments do
not involve the creation of such a senior security, but nevertheless the Port-
folio has undertaken, pending the resolution of this issue by the staff, to
establish a segregated account with respect to its investments in this type of
security and to maintain in such account cash not available for investment or
U.S. Government Securities or other liquid high quality debt securities having
a value equal to the aggregate principal amount of outstanding commercial pa-
per of this type.
Futures Contracts and Options on Futures Contracts. A Portfolio may enter into
contracts for the purchase or sale for future delivery of fixed-income securi-
ties or foreign currencies, or contracts based on financial indices including
any index of U.S. Government Securities, foreign government securities or cor-
porate debt securities and may purchase and write put and call options to buy
or sell futures contracts ("options on futures contracts"). A "sale" of a
futures contract means the acquisition of a contractual obligation by the
Portfolio to deliver the securities or foreign currencies called for by the
contract at a specified price on a specified date. A "purchase" of a futures
contract means the incurring of a contractual obligation to acquire the secu-
rities or foreign currencies called for by the contract at a specified price
on a specified date. The specific securities delivered or taken, respectively,
at settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt of
securities, in most instances the contracts are closed out before the settle-
ment date without the making or taking of delivery of the securities. Closing
out of a futures contract is effected by entering into an offsetting purchase
or sale transaction.
The purchaser of a futures contract on an index agrees to take or make deliv-
ery of an amount of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the contract and
the price at which the contract was originally struck.
Unlike a futures contract, which requires the parties to buy and sell a secu-
rity on a set date, an option on a futures contract entitles its holder to de-
cide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there
are no daily payments of cash in the nature of "variation" or "maintenance"
margin payments to reflect the change in the value of the underlying contract
as there are by a purchaser or seller of a futures contract. The value of the
option does not change and is reflected in the net asset value of the
Portfolio.
The ability to establish and close out positions in options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
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Options on futures contracts to be written or purchased by the Portfolio will
be traded on U.S. or foreign exchanges or over-the-counter.
These investment techniques will be used only to hedge against anticipated fu-
ture changes in market conditions and interest or exchange rates which other-
wise might either adversely affect the value of the Portfolio's securities or
adversely affect the prices of securities which the Portfolio intends to pur-
chase at a later date. See Appendix C to the Fund's Statement of Additional
Information for further discussion of the use, risks and costs of futures con-
tracts and options on futures contracts.
The Portfolio will not (i) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate of margin deposits
on all the outstanding futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Portfolio or (ii) enter into any futures contracts
or options on futures contracts if the aggregate of the market value of the
outstanding futures contracts of the Portfolio and the market value of the
currencies and futures contracts subject to outstanding options written by the
Portfolio would exceed 50% of the market value of the total assets of the
Portfolio.
Options on Foreign Currencies. The Portfolio may purchase and write put and
call options on foreign currencies for the purpose of protecting against de-
clines in the U.S. Dollar value of foreign currency-denominated portfolio se-
curities and against increases in the U.S. Dollar cost of such securities to
be acquired. As in the case of other kinds of options, however, the writing of
an option on a foreign currency constitutes only a partial hedge, up to the
amount of the premium received, and a Portfolio could be required to purchase
or sell foreign currencies at disadvantageous exchange rates, thereby incur-
ring losses. The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Portfolio's position, it may forfeit the en-
tire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by the Portfolio are traded on U.S. and
foreign exchanges or over-the-counter. There is no specific percentage limita-
tion on the Portfolio's investments in options or on foreign currencies. See
the Fund's Statement of Additional Information for further discussion of the
use, risks and costs of options on foreign currencies.
Forward Foreign Currency Exchange Contracts. The Portfolio may purchase or
sell forward foreign currency exchange contracts ("forward contracts") to at-
tempt to minimize the risk to the Portfolio from adverse changes in the rela-
tionship between the U.S. Dollar and foreign currencies. A forward contract is
an obligation to purchase or sell a specific currency for an agreed price at a
future date which is individually negotiated and privately traded by currency
traders and their customers. Forward contracts reduce the potential gain from
a positive change in the relationship between the U.S. Dollar and other cur-
rencies. Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
The Fund's
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Custodian will place liquid assets in a segregated account having a value equal
to the aggregate amount of each Portfolio's commitments under forward contracts
entered into with respect to position hedges and cross-hedges.
Interest Rate Transactions. In order to attempt to protect the value of the
Portfolio's investments from interest rate or currency cross-rate fluctuations,
the Portfolio may enter into various hedging transactions, such as interest
rate swaps and may purchase or sell (i.e. write) interest rate caps and floors.
The Portfolio expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio. The
Portfolio may also enter into these transactions to protect against any in-
crease in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio does not intend to use these transactions in a specu-
lative manner. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments. Interest rate
swaps are entered into on a net basis, i.e., the two payment streams are netted
out, with the Portfolio receiving or paying, as the case may be, only the net
amount of the two payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined inter-
est rate, to receive payments on a contractually-based principal amount from
the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below
a predetermined interest rate to receive payments on a contractually-based
principal amount from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether the Portfolio is
hedging its assets or its liabilities. The net amount of the excess, if any, of
the Portfolio's obligations over its entitlements with respect to each interest
rate swap will be accrued on a daily basis and an amount of liquid assets hav-
ing an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's Custodian. If the Portfolio
enters into an interest rate swap on other than a net basis, the Portfolio will
maintain a segregated account with the Fund's Custodian in the full amount ac-
crued on a daily basis of the Portfolio's obligations with respect to the swap.
The Portfolio will not enter into any interest rate swap, cap or floor trans-
action unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated in the highest rating category of at least one na-
tionally recognized statistical rating organization at the time of entering
into the transaction. The Adviser will monitor the creditworthiness of counter
parties to its interest rate swap, cap and floor transactions on an ongoing ba-
sis. If there is a default by the other party to such a transaction, the Port-
folio will have contractual remedies. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap documentation.
The Adviser has determined that, as a result, the swap market has become rela-
tively liquid. Caps
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and floors are more recent innovations for which standardized documentation
has not yet been developed and, accordingly, they are less liquid than swaps.
To the extent that the Portfolio sells (i.e., writes) caps and floors, it will
maintain in a segregated account with the Fund's Custodian liquid assets hav-
ing an aggregate net asset value at least equal to the full amount, accrued on
a daily basis, of the Portfolio's obligations with respect to the caps or
floors.
General. The successful use of the foregoing investment practices draws upon
the Adviser's special skills and experience with respect to such instruments
and usually depends on the Adviser's ability to forecast interest rate and
currency exchange rate movements correctly. Should interest or exchange rates
move in an unexpected manner, the Portfolio may not achieve the anticipated
benefits of futures contracts, options, interest rate transactions or forward
contracts or may realize losses and thus be in a worse position than if such
strategies had not been used. Unlike many exchange-traded futures contracts
and options on futures contracts, there are no daily price fluctuation limits
with respect to options on currencies and forward contracts, and adverse mar-
ket movements could therefore continue to an unlimited extent over a period of
time. In addition, the correlation between movements in the price of the secu-
rities and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Portfolio's ability to dispose of its positions in futures contracts, op-
tions, interest rate transactions and forward contracts will depend on the
availability of liquid markets in such instruments. Markets in options and
futures with respect to a number of fixed-income securities and currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures contracts, options
and forward contracts. If a secondary market does not exist with respect to an
option purchased or written by the Portfolio over-the-counter, it might not be
possible to effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Portfolio would
have to be exercised in order for the Portfolio to realize any profit and (ii)
the Portfolio may not be able to sell currencies or portfolio securities cov-
ering an option written by the Portfolio until the option expires or it deliv-
ers the underlying futures contract or currency upon exercise. Therefore, no
assurance can be given that the Portfolio will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, the
Portfolio's ability to engage in options and futures transactions may be lim-
ited by tax considerations.
ILLIQUID SECURITIES
Subject to any more restrictive applicable investment policies, none of the
Portfolios will maintain more than 15% of its net assets in illiquid securi-
ties. For purposes of each Portfolio's investment objectives and policies and
investment restrictions, illiquid securities include, among others, (a) direct
placements or other securities which are subject to legal or contractual re-
strictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or, in the case of unlisted securities,
market makers do not exist or will not entertain bids or offers), (b) options
purchased
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by the Portfolio over-the-counter and the cover for options written by the
Portfolio over-the-counter, and (c) repurchase agreements not terminable within
seven days. Securities eligible for resale under Rule 144A under the Securities
Act of 1933, as amended, that have legal or contractual restrictions on resale
but have a readily available market are not deemed illiquid for purposes of
this limitation. The Adviser will monitor the liquidity of such securities un-
der the supervision of the Board of Directors. See the Statement of Additional
Information for further discussion of illiquid securities.
FIXED-INCOME SECURITIES
The value of the shares of each Portfolio that invests in fixed-income securi-
ties will fluctuate with the value of such investments. The value of each Port-
folio's investments will change as the general level of interest rates fluctu-
ates. During periods of falling interest rates, the values of a Portfolio's se-
curities generally rise. Conversely, during periods of rising interest rates,
the values of a Portfolio's securities generally decline.
In seeking to achieve a Portfolio's investment objective, there will be times,
such as during periods of rising interest rates, when depreciation and realiza-
tion of capital losses on securities in a Portfolio's portfolio will be un-
avoidable. Moreover, medium- and lower-rated securities and non-rated securi-
ties of comparable quality may be subject to wider fluctuations in yield and
market values than higher-rated securities under certain market conditions.
Such fluctuations after a security is acquired do not affect the cash income
received from that security but are reflected in the net asset value of a
Portfolio.
Certain debt securities in which the Global Dollar Government Portfolio may in-
vest are floating-rate debt securities. To the extent that the Portfolio does
not enter into interest rate swaps with respect to such floating-rate debt se-
curities, the Portfolio may be subject to greater risk during periods of de-
clining interest rates.
SECURITIES RATINGS
The ratings of fixed-income securities by S&P, Moody's, Duff & Phelps and Fitch
are a generally accepted barometer of credit risk. They are, however, subject
to certain limitations from an investor's standpoint. The rating of an issuer
is heavily weighted by past developments and does not necessarily reflect prob-
able future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. In addition, there may be varying degrees
of difference in credit risk of securities within each rating category.
INVESTMENT IN FIXED-INCOME SECURITIES RATED BAA AND BBB
Securities rated Baa or BBB are considered to have speculative characteristics
and share some of the same characteristics as lower-rated securities, as de-
scribed below. Sustained periods of deteriorating economic conditions or of
rising interest rates are more likely to lead to a weakening in the issuer's
capacity to pay interest and repay principal than in the case of higher-rated
securities.
INVESTMENT IN LOWER-RATED FIXED-INCOME SECURITIES
Lower-rated securities are subject to greater risk of loss of principal and in-
terest than
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higher-rated securities. They are also generally considered to be subject to
greater market risk than higher-rated securities, and the capacity of issuers
of lower-rated securities to pay interest and repay principal is more likely
to weaken than is that of issuers of higher-rated securities in times of dete-
riorating economic conditions or rising interest rates. In addition, lower-
rated securities may be more susceptible to real or perceived adverse economic
conditions than investment grade securities, although the market values of se-
curities rated below investment grade and comparable unrated securities tend
to react less to fluctuations in interest rate levels than do those of higher-
rated securities. Securities rated Ba or BB are judged to have speculative el-
ements or to be predominantly speculative with respect to the issuer's ability
to pay interest and repay principal. Securities rated B are judged to have
highly speculative elements or to be predominantly speculative. Such securi-
ties may have small assurance of interest and principal payments. Securities
rated Baa by Moody's are also judged to have speculative characteristics.
The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. To the extent that there is no established sec-
ondary market for lower-rated securities, a Portfolio's may experience diffi-
culty in valuing such securities and, in turn, the Portfolio's assets.
The Adviser will try to reduce the risk inherent in investment in lower-rated
securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic and political condi-
tions. However, there can be no assurance that losses will not occur. Since
the risk of default is higher for lower-rated securities, the Adviser's re-
search and credit analysis are a correspondingly more important aspect of its
program for managing a Portfolio's securities than would be the case if a
Portfolio did not invest in lower-rated securities. In considering investments
for the Portfolio, the Adviser will attempt to identify those high-yielding
securities whose financial condition is adequate to meet future obligations,
has improved, or is expected to improve in the future. The Adviser's analysis
focuses on relative values based on such factors as interest or dividend cov-
erage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
The Global Dollar Government Portfolio may invest in securities having the
lowest ratings for non-subordinated debt instruments assigned by Moody's or
S&P (i.e., rated C by Moody's or CCC or lower by S&P) and in unrated securi-
ties of comparable investment quality. These securities are considered to have
extremely poor prospects of ever attaining any real investment standing, to
have a current identifiable vulnerability to default, to be unlikely to have
the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions, and/or to be in default or
not current in the payment of interest or principal.
Certain lower-rated securities in which the High Yield Portfolio, the Global
Dollar Government Portfolio, the Utility Income Portfolio, the Growth Invest-
ors Portfolio, the Conservative Investors Portfolio and the Growth Portfolio
may invest, contain call or buy-
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back features which permit the issuer of the security to call or repurchase
it. Such securities may present risks based on payment expectations. If an is-
suer exercises such a provision and redeems the security, the Portfolio may
have to replace the called security with a lower yielding security, resulting
in a decreased rate of return for the Portfolio.
NON-RATED SECURITIES
Non-rated securities will also be considered for investment by the High-Yield
Portfolio, North American Government Income Portfolio and Global Dollar Gov-
ernment Portfolio when the Adviser believes that the financial condition of
the issuers of such securities, or the protection afforded by the terms of the
securities themselves, limits the risk to the Portfolio to a degree comparable
to that of rated securities which are consistent with the Portfolio's objec-
tive and policies.
NON-DIVERSIFIED STATUS
The Short-Term Multi-Market Portfolio, the Global Bond Portfolio, the North
American Government Income Portfolio, the Global Dollar Government Portfolio
and the Worldwide Privatization Portfolio are "non-diversified", which means
the Portfolios are not limited in the proportion of their assets that may be
invested in the securities of a single issuer. However, because the Portfolios
may invest in a smaller number of individual issuers than a diversified port-
folio, an investment in these Portfolios may, under certain circumstances,
present greater risk to an investor than an investment in a diversified port-
folio. Each Portfolio intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code. To
so qualify, among other requirements, each Portfolio will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of the Portfolio's total assets will be in-
vested in the securities of a single issuer, and (ii) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Portfolio will not own more than 10% of the outstanding voting securities of a
single issuer. The Portfolio's investments in U.S. Government Securities are
not subject to these limitations.
In order to meet the diversification tests and thereby maintain its status as
a regulated investment company, the North American Government Income Portfolio
will be required to diversify its portfolio of Canadian Government Securities,
Mexican Government Securities and other foreign government securities in a
manner which would not be necessary if the Portfolio had made similar invest-
ments in U.S. Government Securities.
DEFENSIVE POSITION
When business or financial conditions warrant, the Premier Growth Portfolio,
the Growth and Income Portfolio and the Utility Income Portfolio may assume a
temporary defensive position and invest without limit in high grade fixed in-
come securities or hold their assets in cash equivalents, including (i) short-
term obligations of the U.S. Government and its agencies or instrumentalities,
(ii) certificates of deposit, bankers' acceptances and interest-bearing sav-
ings deposits of banks having total assets of more
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than $1 billion and which are members of the Federal Deposit Insurance Corpora-
tion, and (iii) commercial paper of prime quality rated A-1 or higher by S&P or
Prime-1 or higher by Moody's or, if not rated, issued by companies which have
an outstanding debt issue rated AA or higher by S&P or Aa or higher by Moody's.
For temporary defensive purposes, the Global Dollar Government Portfolio may
vary from its investment policies during periods in which economic or political
conditions warrant. Under such circumstances, the Portfolio may invest without
limit in (i) Government Securities and (ii) the following U.S. dollar-denomi-
nated investments: (a) indebtedness rated Aa or better by Moody's or AA or bet-
ter by S&P, or if not so rated, of equivalent investment quality as determined
by the Adviser, (b) certificates of deposit, bankers' acceptances and interest-
bearing savings deposits of banks having total assets of more than $1 billion
and which are members of the Federal De- posit Insurance Corporation and (c)
commercial paper of prime quality rated A-1 or better by S&P or Prime 1 or bet-
ter by Moody's or, if not so rated, issued by companies which have an outstand-
ing debt issue rated AA or better by S&P or Aa or better by Moody's. The Global
Dollar Government Portfolio may also at any time, with respect to up to 35% of
its total assets, temporarily invest funds awaiting reinvestment or held for
reserves for dividends and other distributions to shareholders in such U.S.
dollar-denominated money market instruments.
For temporary defensive purposes, the Conservative Investors Portfolio, the
Growth Investors Portfolio and the Growth Portfolio may invest in money market
instruments. The Growth Portfolio may also invest in repurchase agreements.
For temporary defensive purposes, the Worldwide Privatization Portfolio may
vary from its fundamental investment policy during periods in which conditions
in securities markets or other economic or political conditions warrant. The
Portfolio may reduce its position in equity securities and increase without
limit its position in short-term, liquid, high-grade debt securities, which may
include securities issued by the U.S. government, its agencies and instrumen-
talities ("U.S. Government Securities"), bank deposits, money market
instruments, short-term (for this purpose, securities with a remaining maturity
of one year or less) debt securities, including notes and bonds, and short-term
foreign currency denominated debt securities rated A or higher by S&P or
Moody's or, if not so rated, of equivalent investment quality as determined by
Alliance. For this purpose the Portfolio will limit its investments in foreign
currency denominated debt securities to securities that are denominated in cur-
rencies in which the Portfolio anticipates its subsequent investments will be
denominated.
Subject to its policy of investing at least 65% of its total assets in equity
securities of enterprises undergoing privatization, the Portfolio may also at
any time temporarily invest funds awaiting reinvestment or held as reserves for
dividends and other distributions to shareholders in money market instruments
referred to above.
For temporary defensive purposes, the Real Estate Investment Portfolio may in-
crease without limit its position in short-term, liquid, high-grade debt secu-
rities, which may
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include securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities ("U.S. Government securities"), bank deposits, money mar-
ket instruments, short-term debt securities, including notes and bonds. For a
description of the types of securities in which the Portfolio may invest while
in a temporary defensive position, see the Statement of Additional Informa-
tion.
PORTFOLIO TURNOVER
Generally, the Fund's policy with respect to turnover of securities held in
the Portfolios is to purchase securities for investment purposes and not for
the purpose of realizing short-term trading profits or for the purpose of ex-
ercising control. When circumstances warrant, however, securities may be sold
without regard to the length of time held.
Because the Money Market Portfolio invests in securities with short maturi-
ties, there may be a relatively high portfolio turnover rate. However, the
turnover rate does not have an adverse effect upon the net yield and net asset
value of the Portfolio's shares since the Portfolio's securities transactions
occur primarily with issuers, underwriters or major dealers in money market
investments acting as principals at net prices in which the Fund incurs little
or no brokerage costs.
The annual portfolio turnover rate of the Premier Growth Portfolio may be in
excess of 100%. Although the Fund cannot accurately predict its annual portfo-
lio turnover rate, the Adviser does not expect the annual portfolio turnover
of the Growth and Income Portfolio, the Total Return Portfolio, the Interna-
tional Portfolio and the Technology Portfolio to exceed 100%. A 100% annual
portfolio turnover rate would occur, for example, if all of the stocks in a
portfolio were replaced in a period of one year. A 100% turnover rate is
greater than that of most other investment companies, including those which
emphasize capital appreciation as a basic policy, and may result in corre-
spondingly greater brokerage commissions being paid by the Portfolio and a
higher incidence of short-term capital gain taxable as ordinary income. It is
anticipated that the annual portfolio turnover rate of the Growth and Income
Portfolio may be in excess of 50% but less than 100%. See "Dividends, Distri-
butions and Taxes."
The High-Yield Portfolio, the U.S. Government/High Grade Securities Portfolio
and the Global Bond Portfolio will actively use trading to benefit from yield
disparities among different issues of fixed-income securities or otherwise to
achieve their investment objectives and policies. Management anticipates that
the annual turnover in the High-Yield Portfolio may be in excess of 200% in
future years (but is not expected to exceed 250%). An annual turnover rate of
200% occurs, for example, when all of the securities in a Portfolio are re-
placed twice in a period of one year. A 200% turnover rate is greater than
that of many other investment companies. Although management cannot accurately
predict its portfolio turnover rate, it is anticipated that the annual turn-
over rate for the U.S. Government/High Grade Securities Portfolio and the
Global Bond Portfolio generally will not exceed 400% (excluding turnover of
securities having a maturity of one year or less). The annual turnover rate of
400% occurs, for example, when all of the securities in the Portfolio are re-
placed four
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times in a period of one year. A 400% turnover rate is greater than that of
most other investment companies. These Portfolios may be subject to a greater
degree of turnover and, thus, a higher incidence of short-term capital gain
taxable as ordinary income than might be expected from investment companies
which invest substantially all of their funds on a long-term basis and corre-
spondingly larger mark-up charges can be expected to be borne by the Portfo-
lios. See "Dividends, Distributions and Taxes."
The Short-Term Multi-Market Portfolio and the Global Dollar Government Portfo-
lio may engage in active short-term trading to benefit from yield disparities
among different issues of securities, to seek short-term profits during periods
of fluctuating interest rates, or for other reasons. Such trading will increase
each Portfolio's rate of turnover and the incidence of short-term capital gain
taxable as ordinary income. Management anticipates that the annual turnover in
the Short-Term Multi-Market Portfolio will not be in excess of 500%. An annual
turnover rate of 500% occurs, for example, when all of the securities in the
portfolio are replaced five times in a period of one year. The Adviser antici-
pates that the annual turnover in the Global Dollar Government Portfolio will
not be in excess of 300% (excluding turnover of securities having a maturity of
one year or less). An annual turnover rate of 300% occurs, for example, when
all of the securities in the Portfolio are replaced three times in a period of
one year. Management anticipates that the annual turnover in the North American
Government Income Portfolio will not be in excess of 400%. An annual turnover
rate of 400% occurs, for example, when all of the securities in the Portfolio
are replaced four times in a period of one year. Management anticipates that
the annual turnover in the Utility Income Portfolio will not be in excess of
200%. An annual turnover rate of 200% occurs, for example, when all the securi-
ties in the Portfolio are replaced twice in a period of one year.
Management expects that the annual turnover in the Growth Investors Portfolio
and the Growth Portfolio will not exceed 200%. An annual turnover rate of 200%
occurs, for example, when all the securities in a Portfolio are replaced twice
in a period of one year. Management expects that the annual turnover in the
Conservative Investors Portfolio will not exceed 100%. An annual turnover rate
of 100% occurs, for example, when all the securities in a Portfolio are re-
placed once in a period of one year.
Generally, the policy of the Worldwide Privatization Portfolio with respect to
portfolio turnover is to purchase securities with a view to holding them for
periods of time sufficient to assure that the Portfolio will realize less than
30% of its gross income from the sale or other disposition of securities held
for less than three months (see "Dividends, Distributions and Taxes") and to
hold its securities for six months or longer. However, it is also the Portfo-
lio's policy to sell any security whenever, in the judgment of the Adviser, its
appreciation possibilities have been substantially realized or the business or
market prospects for such security have deteriorated, irrespective of the
length of time that such security has been held. The Adviser anticipates that
the Portfolio's annual rate of portfolio turnover will not exceed 200%. A 200%
annual turnover rate would occur if all the securities in the Portfolio's were
replaced twice within a period of one year.
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Generally, the Quasar Portfolio's policy with respect to turnover of securities
held in the Portfolio is to purchase securities for investment purposes and not
for the purpose of realizing short-term trading profits or for the purpose of
exercising control. When circumstances warrant, however, securities may be sold
without regard to the length of time held. The Adviser anticipates that the
Portfolio's annual rate of portfolio turnover generally will not be in excess
of 200%.
The Adviser anticipates that the Real Estate Investment Portfolio's annual rate
of turnover will not exceed 100%. A 100% annual turnover rate would occur if
all of the securities in the Portfolio's portfolio are replaced once in a pe-
riod of one year. A higher rate of portfolio turnover involves correspondingly
greater brokerage and other expenses than a lower rate, which must be borne by
the Portfolio and its shareholders. High portfolio turnover also may result in
the realization of substantial net short-term capital gains. See "Dividends,
Distributions and Taxes."
A high rate of portfolio turnover involves correspondingly greater expenses
than a lower rate, which expenses must be borne by the Portfolio and its share-
holders. High portfolio turnover also may result in the realization of substan-
tial net short-term capital gains. In order to continue to qualify as a regu-
lated investment company for Federal tax purposes, less than 30% of the annual
gross income of a Portfolio must be derived from the sale of securities held by
the Portfolio for less than three months. See "Dividends, Distributions and
Taxes."
CERTAIN FUNDAMENTAL INVESTMENT POLICIES
The Fund has adopted certain fundamental investment policies applicable to the
Portfolios which may not be changed with respect to a Portfolio without the ap-
proval of the shareholders of a Portfolio. Certain of those fundamental invest-
ment policies are set forth below. For a complete listing of such fundamental
investment policies, see the Statement of Additional Information.
Briefly, with respect to the Money Market Portfolio, the Premier Growth Portfo-
lio, the Growth and Income Portfolio, the U.S. Government/High Grade Securities
Portfolio, the High-Yield Portfolio, the Total Return Portfolio and the Inter-
national Portfolio, these fundamental investment policies provide that a Port-
folio may not: (i) invest in securities of any one issuer (including repurchase
agreements with any one entity) other than securities issued or guaranteed by
the United States Government, if immediately after such purchases more than 5%
of the value of its total assets would be invested in such issuer, except that
25% of the value of the total assets of a Portfolio may be invested without re-
gard to such 5% limitation; (ii) acquire more than 10% of any class of the out-
standing securities of any issuer (for this purpose, all preferred stock of an
issuer shall be deemed a single class, and all indebtedness of an issuer shall
be deemed a single class); (iii) invest more than 25% of the value of its total
assets at the time an investment is made in the securities of issuers con-
ducting their principal business activities in any one industry, except that
there is no such limitation with respect to U.S. Government securities or cer-
tificates of deposit, bankers' acceptances and interest-bearing deposits. For
purposes of this investment restriction, the electric, gas, telephone and water
business shall each be considered as a separate industry; (iv) borrow money, ex-
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cept that a Portfolio may borrow money only for extraordinary or emergency
purposes and then only in amounts not exceeding 15% of its total assets at the
time of borrowing; (v) mortgage, pledge or hypothecate any of its assets, ex-
cept as may be necessary in connection with permissible borrowings described
in paragraph (iv) above (in an aggregate amount not to exceed 15% of total
assets of a Portfolio), or as permitted in connection with short sales of se-
curities "against the box" by the Growth Portfolio, as described above; (vi)
invest in illiquid securities if immediately after such investment more than
10% of the Portfolio's total assets (taken at market value) would be invested
in such securities. Illiquid securities purchased by the High-Yield Portfolio
may include: (i) subordinated debentures or other debt securities issued in
the course of acquisition financing such as that associated with leveraged
buyout transactions, and (ii) participation interests in loans to domestic
companies, or to foreign companies and governments, originated by commercial
banks and supported by letters of credit or other credit facilities offered by
such banks or other financial institutions; or (vii) invest more than 10% of
the value of its total assets in repurchase agreements not terminable within
seven days.
With respect to the Short-Term Multi-Market Portfolio and the Global Bond
Portfolio, these fundamental investment policies provide that a Portfolio may
not: (i) invest 25% or more of its total assets in securities of companies
engaged principally in any one industry (other than, with respect to the
Short-Term Multi-Market Portfolio only, the banking industry) except that
this restriction does not apply to U.S. Government Securities; (ii) borrow
money except from banks for temporary or emergency purposes, including the
meeting of redemption requests which might require the untimely disposition of
securities; borrowing in the aggregate may not exceed 15%, and borrowing for
purposes other than meeting redemptions may not exceed 5% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities (not
including the amount borrowed) at the time the borrowing is made; securities
will not be purchased while borrowings in excess of 5% of the value of the
Portfolio's total assets are outstanding; (iii) pledge, hypothecate, mortgage
or otherwise encumber its assets, except to secure permitted borrowings; or
(iv) invest in illiquid securities if immediately after such investment more
than 10% of the Portfolio's total assets (taken at market value) would be in-
vested in such securities.
With respect to the North American Government Income Portfolio and the Global
Dollar Government Portfolio, these fundamental investment policies provide
that a Portfolio may not: (i) invest 25% or more of their respective total as-
sets in securities of companies engaged principally in any one industry except
that this restriction does not apply to U.S. Government Securities; (ii) bor-
row money, except (a) the North American Government Income Portfolio and the
Global Dollar Government Portfolio may, in accordance with provisions of the
Act, borrow money from banks for temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposi-
tion of securities; borrowing in the aggregate may not exceed 15%, and borrow-
ing for purposes other than meeting redemptions may not exceed
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5% of the value of the Portfolio's total assets (including the amount borrow-
ed) at the time the borrowing is made; outstanding borrowings in excess of 5%
of the value of the Portfolio's total assets will be repaid before any subse-
quent investments are made and (b) the Global Dollar Government Portfolio may
enter into reverse repurchase agreements and dollar rolls; or (iii) pledge,
hypothecate, mortgage or otherwise encumber their respective assets, except to
secure permitted borrowings.
As a matter of fundamental policy, the Utility Income Portfolio may not: (i)
invest more than 5% of its total assets in the securities of any one issuer
except the U.S. Government, although with respect to 25% of its total assets
it may invest in any number of issuers; (ii) invest 25% or more of its total
assets in the securities of issuers conducting their principal business
activities in any one industry, other than the utilities industry, except that
this restriction does not apply to U.S. Government Securities; (iii) purchase
more than 10% of any class of the voting securities of any one issuer; (iv)
borrow money except from banks or temporary or emergency purposes, including
the meeting of redemption requests which might require the untimely disposi-
tion of securities; borrowing in the aggregate may not exceed 15%, and borrow-
ing for purposes other than meeting redemptions may not exceed 5% of the value
of the Portfolio's total assets (including the amount borrowed) less liabili-
ties (not including the amount borrowed) at the time the borrowing is made;
outstanding borrowings in excess of 5% of the value of the Portfolio's total
assets will be repaid before any subsequent investments are made; or (v) pur-
chase a security if, as a result (unless the security is acquired pursuant to
a plan of reorganization or an offer of exchange), the Portfolio would own any
securities of an open-end investment company or more than 3% of the total out-
standing voting stock of any closed-end investment company or more than 5% of
the value of the Portfolio's net assets would be invested in securities of any
one or more closed-end investment companies.
With respect to the Conservative Investors Portfolio, the Growth Investors
Portfolio and the Growth Portfolio, these fundamental investment policies pro-
vide that a Portfolio may not: (i) invest more than 5% of its total assets in
the securities of any one issuer (other than U.S. Government securities and
repurchase agreements relating thereto), although up to 25% of the Portfolio's
total assets may be invested without regard to this restriction; or (ii) in-
vest 25% or more of its total assets in the securities of any one industry.
(Obligations of a foreign government and its agencies or instrumentalities
constitute a separate "industry" from those of another foreign government.)
With respect to the Worldwide Privatization Portfolio, these fundamental poli-
cies provide that the Portfolio may not: (i) invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry, except that this restriction does not apply to (a) U.S.
Government Securities; or (b) the purchase of securities of issuers whose pri-
mary business activity is in the national commercial banking industry, so long
as the Fund's Board of Directors determines, on the basis of factors such as
liquidity, availabil-
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ity of investments and anticipated returns, that the Portfolio's ability to
achieve its investment objective would be adversely affected if the Portfolio
were not permitted to invest more than 25% of its total assets in those secu-
rities, and so long as the Portfolio notifies its shareholders of any decision
by the Board of Directors to permit or cease to permit the Portfolio to invest
more than 25% of its total assets in those securities, such notice to include
a discussion of any increased investment risks to which the Portfolio may be
subjected as a result of the Board's determination; (ii) borrow money except
from banks for temporary or emergency purposes, including the meeting of re-
demption requests which might require the untimely disposition of securities;
borrowing in the aggregate may not exceed 15%, and borrowing for purposes
other than meeting redemptions may not exceed 5% of the value of the Portfo-
lio's total assets (including the amount borrowed) less liabilities (not in-
cluding the amount borrowed) at the time the borrowing is made; outstanding
borrowings in excess of 5% of the value of the Portfolio's total assets will
be repaid before any investments are made; or (iii) pledge, hypothecate, mort-
gage or otherwise encumber its assets, except to secure permitted borrowings.
With respect to the Technology Portfolio, these fundamental policies provide
that the Portfolio may not: (i) with respect to 75% of its total assets, have
such assets represented by other than: (a) cash and cash items, (b) U.S. Gov-
ernment securities, or (c) securities of any one issuer (other than the U.S.
Government and its agencies or instrumentalities) not greater in value than 5%
of the Technology Portfolio's total assets, and not more than 10% of the out-
standing voting securities of such issuer; (ii) purchase the securities of any
one issuer, other than the U.S. Government and its agencies or instrumentali-
ties, if as a result (a) the value of the holdings of the Technology Portfolio
in the securities of such issuer exceeds 25% of its total assets, or (b) the
Technology Portfolio owns more than 25% of the outstanding securities of any
one class of securities of such issuer; (iii) concentrate its investments in
any one industry, but the Technology Portfolio has reserved the right to in-
vest up to 25% of its total assets in a particular industry; and (iv) invest
in the securities of any issuer which has a record of less than three years of
continuous operation (including the operation of any predecessor) if such pur-
chase would cause 10% or more of its total assets to be invested in the secu-
rities of such issuers.
With respect to the Quasar Portfolio these fundamental policies provide that
the Portfolio may not: (i) purchase the securities of any one issuer, other
than the U.S. Government or any of its agencies or instrumentalities, if as a
result more than 5% of its total assets would be invested in such issuer or
the Portfolio would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of its total asset may be invested without
regard to these 5% and 10% limitations; (ii) invest more than 25% of its total
assets in any particular industry; and (iii) borrow money except for temporary
or emergency purposes in an amount not exceeding 5% of its total assets at the
time the borrowing is made.
With respect to the Real Estate Investment Portfolio these fundamental poli-
cies provide
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<PAGE>
that the Portfolio may not: (i) with respect to 75% of its total assets, have
such assets represented by other than: (a) cash and cash items, (b) U.S. Gov-
ernment securities, or (c) securities of any one issuer (other than the U.S.
Government and its agencies or instrumentalities) not greater in value than 5%
of the Portfolio's total assets, and not more than 10% of the outstanding vot-
ing securities of such issuer; (ii) purchase the securities of any one issuer,
other than the U.S. Government and its agencies or instrumentalities, if as a
result (a) the value of the holdings of the Portfolio in the securities of
such issuer exceeds 25% of its total assets, or (b) the Portfolio owns more
than 25% of the outstanding securities of any one class of securities of such
issuer; (iii) invest 25% or more of its total assets in the securities of is-
suers conducting their principal business activities in any one industry,
other than the real estate industry, in which the Portfolio will invest at
least 25% or more of its total assets, except that this restriction does not
apply to U.S. Government securities; (iv) purchase or sell real estate, except
that it may purchase and sell securities of companies which deal in real es-
tate or interests therein, including Real Estate Equity Securities; or (v)
borrow money except for temporary or emergency purposes or to meet redemption
requests, in an amount not exceeding 5% of the value of its total assets at
the time the borrowing is made.
In addition, the Fund has adopted an investment policy, which is not desig-
nated a "fundamental policy" within the meaning of the Act, of intending to
have each Portfolio comply at all times with the diversification requirements
prescribed in Section 817(h) of the Internal Revenue Code or any successor
thereto and the applicable Treasury Regulations thereunder. This policy may be
changed upon notice to shareholders of the Fund, but without their approval.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
DIRECTORS
John D. Carifa, Chairman of the Board and President, is President and Chief
Operating Officer, the Chief Financial Officer and a Director of Alliance Cap-
ital Management Corporation ("ACMC"), the sole general partner of the Adviser,
with which he has been associated since prior to 1992.
Ruth Block is a Director of Ecolab Incorporated (specialty chemicals) and
Amoco Corporation (oil and gas). She was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable Life Assurance Society of the
United States since prior to 1992.
David H. Dievler was formerly President of the Fund, and a Senior Vice Presi-
dent of ACMC, with which he had been associated since prior to 1992. He is
currently an independent consultant.
John H. Dobkin is President of Historic Hudson Valley (historic preservation)
since prior to 1992. Previously, he was Director of the National Academy of
Design. From 1987 to 1992, he was a Director of ACMC.
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<PAGE>
William H. Foulk, Jr. is an investment adviser and an independent consultant.
He was formerly a Senior Manager of Barrett Associates, Inc., a registered in-
vestment adviser, with which he had been associated since prior to 1992.
Dr. James M. Hester is President of the Harry Frank Guggenheim Foundation and
a Director of Union Carbide Corporation since prior to 1992. He was formerly
President of New York University, The New York Botanical Garden and Rector of
the United Nations University.
Clifford L. Michel is a member of the law firm of Cahill Gordon & Reindel,
with which he has been associated since prior to 1992. He is president and
Chief Executive Officer of Wenonah Development Company (investments) and a Di-
rector of Placer Dome, Inc. (mining).
Donald J. Robinson was formerly a partner at Orrick, Herrington & Sutcliffe
and is currently Senior Counsel to that firm. He was also a Trustee of the Mu-
seum of the City of New York from 1977-1995.
ADVISER
Alliance Capital Management L.P. (the "Adviser"), a Delaware limited partner-
ship with principal offices at 1345 Avenue of the Americas, New York, New York
10105 has been retained under an investment advisory agreement (the "Invest-
ment Advisory Agreement") to provide investment advice and, in general, to
conduct the management and investment program of each of the Fund's Portfolios
subject to the general supervision and control of the Board of Directors of
the Fund. The employee of the Adviser principally responsible for the Money
Market Portfolio's investment program since its inception is Pamela F. Rich-
ardson, who is a Vice President of ACMC. Ms. Richardson has been associated
with ACMC since prior to 1992. The employee of the Adviser principally respon-
sible for the Premier Growth Portfolio's investment program since its incep-
tion is Alfred Harrison, who is Vice Chairman of ACMC, with which he has been
associated since prior to 1992. The employee of the Adviser principally re-
sponsible for the Growth and Income Portfolio's investment program since its
inception is Paul Rissman, who is a Vice President of ACMC with which he has
been associated since prior to 1992. The employee of the Adviser principally
responsible for the U.S. Government/High Grade Securities Portfolio's invest-
ment program since its inception is Paul J. DeNoon, who is a Vice President of
ACMC, with which he has been associated since prior to 1992. Prior to that,
Mr. DeNoon was Vice President of Manufacturers Hanover Trust since prior to
1992. The employee of the Adviser principally responsible for the Total Return
Portfolio's investment program since 1996 is Paul Rissman, who is a Vice Pres-
ident of ACMC, with which he has been associated since prior to 1992. The em-
ployee of the Adviser principally responsible for the International Portfo-
lio's investment program since 1996 is Steven Beinhacker, a Vice President of
ACMC with which he has been associated since prior to 1992. The employee of
the Adviser principally responsible for the Short-Term Multi-Market Portfo-
lio's investment program since its inception is Douglas J. Peebles, who is a
Vice President of ACMC, with which he has been associated since prior to 1992.
The person principally responsible for the investment program of the Global
Bond
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<PAGE>
Portfolio since its inception is Ian Coulman, an Investment Manager of the
Sub-Adviser. The employee of the Adviser principally responsible for the in-
vestment program since inception of the North American Government Income Port-
folio and the Global Dollar Government Portfolio is Wayne D. Lyski, an Execu-
tive Vice President of ACMC, with which he has been associated since prior to
1992. The employee of the Adviser principally responsible for the investment
program of the Utility Income Portfolio since 1996 is Paul Rissman, who is a
Vice President of ACMC with which he has been associated since prior to 1992.
The employee of the Adviser principally responsible for the investment program
since February 1996 of the Conservative Investors Portfolio and Growth Invest-
ors Portfolio is Robert G. Heisterberg, who is Senior Vice President of the
Adviser, with which he has been associated since prior to 1992. The employee
of the Adviser principally responsible for the investment program since incep-
tion of the Growth Portfolio is Tyler J. Smith, who is a Senior Vice President
of the Adviser. Prior to joining the Adviser in July 1993, Mr. Smith was em-
ployed by Equitable Capital or its affiliates since prior to 1992. The em-
ployee of the Adviser principally responsible for the investment program since
inception of the Worldwide Privatization Portfolio is Mark H. Breedon, a Vice
President of the Adviser and a Director and Vice President of Alliance Capital
Limited, an indirect wholly-owned subsidiary of the Adviser, with which he has
been associated since prior to 1992. The employees of the Adviser principally
responsible for the investment program since inception of the Technology Port-
folio are Peter Anastos and Gerald T. Malone. Mr. Anastos has been associated
with the Adviser since prior to 1992 and Mr. Malone has been associated with
the Adviser since 1992. Prior thereto, Mr. Malone was associated with College
Retirement Equities Fund since prior to 1992. The employees of the Adviser
principally responsible for the Quasar Portfolio's investment program since
its inception are Alden M. Stewart and Randall E. Haase. Mr. Stewart and Mr.
Haase have each been associated with the Adviser since 1992.* The employee of
the Adviser principally responsible for the Real Estate Investment Portfolio's
investment program since its inception is Daniel G. Pine. Mr. Pine, who is a
Senior Vice President and Research Analyst of ACMC, with which he has been as-
sociated since May of 1996. Prior thereto, Mr. Pine was Senior Vice President
of Desai Capital Management since prior to 1992. The employees of the Adviser
principally responsible for the High Yield Portfolio investment program since
its inception are Nelson R. Jantzen and Wayne C. Tappe. Mr. Jantzen and Mr.
Tappe have each been associated with the Adviser since prior to 1992.*
The Adviser has retained under a subadvisory agreement a sub-adviser, AIGAM
International Limited (the "Sub-Adviser"), an indirect, majority owned subsid-
iary of American International Group, Inc., a major international financial
service company to provide research and management services to the Global Bond
Portfolio. In 1994, the Sub-Adviser changed its name from Dempsey & Company
International Limited, which was founded in 1988.
- --------
*Prior to July 22, 1993, with Equitable Capital Management Corporation
(Equitable Capital). On that date Alliance acquired the business and
substantially all of the assets of Equitable Capital and became the investment
adviser to the Fund.
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<PAGE>
The Sub-Adviser is an asset management firm specializing in global fixed-in-
come money management. The Sub-Adviser manages a range of institutional spe-
cialty funds, investment companies, and dedicated institutional portfolios.
In providing advisory services to the Real Estate Investment Portfolio and
other clients investing in real estate securities, the Adviser has access to
the research services of Koll Investment Management, the Investment Management
Division of Koll, which acts as a consultant to the Adviser with respect to
the real estate market. As a consultant, Koll provides to the Adviser, at the
Adviser's expense, such in-depth information regarding the real-estate market,
the factors influencing regional valuations and analysis of recent transac-
tions in office, retail, industrial and multi-family properties as the Adviser
shall from time to time request. Koll will not furnish investment advice or
make recommendations regarding the purchase or sale of securities by the Port-
folio nor will it be responsible for making investment decisions involving
Portfolio assets.
Koll is one of the largest fee-based property management firms in the United
States as well as one of the largest publishers of real estate research, with
approximately 2,600 employees nationwide. Koll will provide the Adviser with
exclusive access to its REIT . Score model which ranks approximately 115 REITs
based on the relative attractiveness of the property markets in which they own
real estate. This model scores the approximately 9,000 individual properties
owned by these companies. REIT . Score is in turn based on Koll's National
Real Estate Index which gathers, analyzes and publishes targeted research data
for the 65 largest U.S. real estate markets based on a variety of public- and
private-sector sources as well as Koll's proprietary database of 45,000 com-
mercial property transactions representing over $250 billion of investment
property and over 2,000 tracked properties which report rent and expense data
quarterly. Koll has previously provided access to its REIT . Score model re-
sults primarily to the institutional market through subscriptions. The model
is no longer provided to any research publications, and the Portfolio and an-
other mutual fund managed by the Adviser are currently the only mutual funds
available to retail investors that have access to Koll's REIT . Score model.
The Adviser is a leading international investment manager supervising client
accounts with assets as of December 31, 1996 totaling more than $182 billion
(of which approximately $63 billion represented the assets of investment com-
panies). The Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies, foundations
and endowment funds. The 52 registered investment companies managed by the Ad-
viser comprising 110 separate investment portfolios currently have over two
million shareholders. As of December 31, 1996, the Adviser was retained as an
investment manager by 34 of the Fortune 100 companies.
ACMC, the sole general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary of The Equi-
table Life Assurance Society of the United States ("Equitable"), one of the
largest life insurance companies in the United States and a wholly owned sub-
109
<PAGE>
sidiary of the Equitable Companies Incorporated, a holding company which is
controlled by AXA, a French insurance holding company. Certain information con-
cerning the ownership and control of Equitable by AXA is set forth in the
Statement of Additional Information under "Management of the Fund."
The Adviser provides investment advisory services and order placement facili-
ties for each of the Fund's Portfolios and pays all compensation of Directors
and officers of the Fund who are affiliated persons of the Adviser. The Adviser
or its affiliates also furnish the Fund, without charge, management supervision
and assistance and office facilities and provide persons satisfactory to the
Fund's Board of Directors to serve as the Fund's officers. Each of the Portfo-
lios pays the Adviser at the following annual percentage rate of its average
daily net asset value:
<TABLE>
<S> <C>
Money Market Portfolio .500%
Premier Growth Portfolio 1.000%
Growth and Income Portfolio .625%
U.S. Government/High Grade
Securities Portfolio .600%
High-Yield Portfolio .750%
Total Return Portfolio .625%
International Portfolio 1.000%
Short-Term Multi-Market
Portfolio .550%
Global Bond Portfolio .650%
North American Government
Income Portfolio .650%
Utility Income Portfolio .750%
Global Dollar Government
Portfolio .750%
Conservative Investors
Portfolio .750%
Growth Investors Portfolio .750%
Growth Portfolio .750%
Worldwide Privatization
Portfolio 1.000%
Technology Portfolio 1.000%
Quasar Portfolio 1.000%
Real Estate Investment
Portfolio .900%
</TABLE>
The fees are accrued daily and paid monthly. For the year ended December 31,
1996, the Adviser received no net advisory fees from the Short Term Multi-Mar-
ket Portfolio, the Global Dollar Government Portfolio, the Growth Investors
Portfolio, the Quasar Portfolio, the Real Estate Investment Portfolio and the
High Yield Portfolio. For the year ended December 31, 1996 the Adviser received
an advisory fee from each of the Premier Growth Portfolio, the Global Bond
Portfolio, the Growth & Income Portfolio, the U.S. Government/High Grade Secu-
rities Portfolio, the Total Return Portfolio, the International Portfolio, the
Money Market Portfolio, the North American Government Income Portfolio, the
Utility Income Portfolio, the Growth Portfolio, the Worldwide Privatization
Portfolio, the Conservative Investors Portfolio and the Technology Portfolio so
that each such Portfolio paid an advisory fee equal to .72%, .44%, .63%, .54%,
.46%, .04%, .50%, .19%, .19%, .74%, .10%, .30% and .33% of each such Portfo-
lio's average net assets, respectively.
For the year ended December 31, 1996, for its services as Sub-Adviser to the
Global Bond Portfolio, the Sub-Adviser received from the Adviser a monthly fee
at the annual rate of .40% of that Portfolio's average daily net asset value.
EXPENSES OF THE FUND
In addition to the payments to the Adviser under the Investment Advisory Agree-
ment
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<PAGE>
described above, the Fund pays certain other costs including (a) custody,
transfer and dividend disbursing expenses, (b) fees of Directors who are not
affiliated with the Adviser, (c) legal and auditing expenses, (d) clerical,
accounting and other office costs, (e) costs of printing the Fund's prospec-
tuses and shareholder reports, (f) cost of maintaining the Fund's existence,
(g) interest charges, taxes, brokerage fees and commissions, (h) costs of sta-
tionery and supplies, (i) expenses and fees related to registration and filing
with the Commission and with state regulatory authorities, and (j) cost of
certain personnel of the Adviser or its affiliates rendering clerical, ac-
counting and other services to the Fund.
As to the obtaining of clerical and accounting services not required to be
provided to the Fund by the Adviser under the Investment Advisory Agreement,
the Fund may employ its own personnel. For such services, it may also utilize
personnel employed by the Adviser or by its affiliates; in such event, the
services are provided to the Fund at cost and the payments specifically ap-
proved in advance by the Fund's Board of Directors.
For the year ended December 31, 1996, the ordinary operating expenses of the
Growth and Income Portfolio were .82%, the Short-Term Multi-Market Portfolio
were .95%, the Global Bond Portfolio were .94%, the Money Market Portfolio
were .69%, the Premier Growth Portfolio were .95%, the U.S. Government/High
Grade Portfolio were .92%, the Total Return Portfolio were .95%, the Interna-
tional Portfolio were .95%, the North American Government Income Portfolio
were .95%, the Global Dollar Government Portfolio were .95%, the Utility In-
come Portfolio were .95%, the Conservative Investors Portfolio were .95%, the
Growth Portfolio were .93%, the Growth Investors Portfolio were .95%, the
Worldwide Privatization Portfolio were .95%, the Technology Portfolio were
.95% and the Quasar Portfolio were .95% of each such Portfolio's average net
assets, all net of voluntary expense reimbursements.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
Shares of each Portfolio of the Fund are offered on a continuous basis di-
rectly by the Fund and by Alliance Fund Distributors, Inc., the Fund's Princi-
pal Underwriter, to the separate accounts of certain life insurance companies
without any sales or other charge, at each Portfolio's net asset value, as de-
scribed below. The separate accounts of insurance companies place orders to
purchase shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrendered and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies which are funded by shares of the Portfolios. The Fund re-
serves the right to suspend the sale of the Fund's shares in response to con-
ditions in the securities markets or for other reasons. Individuals may not
place orders directly with the Fund. See the Prospectus of the separate ac-
count of the participating insurance company for more information on the pur-
chase of Portfolio shares.
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<PAGE>
The public offering price of each Portfolio's shares is their net asset value.
The per share net asset value of each Portfolio is computed in accordance with
the Fund's Articles of Incorporation and By-Laws, at the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time), following receipt of a purchase or redemption order by the
Fund, on each Fund business day on which such an order is received and trading
in the types of securities in which the Fund invests might materially affect
the value of Fund shares. The Fund's per share net asset value is computed by
dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any week-
day exclusive of days on which the Exchange is closed (most national holidays
and Good Friday). For purposes of this computation, the securities in each
Portfolio are valued at their current market value (in the case of the Money
Market Portfolio, amortized cost value is used) determined on the basis of
market quotations or, if such quotations are not readily available, such other
methods as the Directors believe would accurately reflect fair market value.
Portfolio securities may also be valued on the basis of prices provided by a
pricing service when such prices are believed by the Adviser to reflect the
fair market value of such securities. In the case of the Money Market Portfo-
lio, per share net asset value is expected to be constant at $1.00 per share,
although this price is not guaranteed.
REDEMPTION OF SHARES
An insurance company separate account may redeem all or any portion of the
shares of any Portfolio in its account at any time at the net asset value per
share of that Portfolio next determined after a redemption request in proper
form is furnished to the Fund or the Principal Underwriter. Any certificates
representing shares being redeemed must be submitted with the redemption re-
quest. Shares redeemed are entitled to earn dividends, if any, up to and in-
cluding the day redemption is effected. There is no redemption charge. Payment
of the redemption price will normally be made within seven days after receipt
of such tender for redemption.
The right of redemption may be suspended or the date of payment may be post-
poned for any period during which the Exchange is closed (other than customary
weekend and holiday closings) or during which the Commission determines that
trading thereon is restricted, or for any period during which an emergency (as
determined by the Commission) exists as a result of which disposal by the Fund
of securities owned by a Portfolio is not reasonably practicable or as a re-
sult of which it is not reasonably practicable for the Fund fairly to deter-
mine the value of a Portfolio's net assets, or for such other periods as the
Commission may by order permit for the protection of security holders of the
Fund. For information regarding how to redeem shares in the Fund please see
your insurance company separate account prospectus.
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<PAGE>
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DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The Money Market Portfolio declares income dividends each business day at 4:00
p.m. Eastern time and such dividends are paid monthly via automatic investment
in additional full and fractional shares in each shareholders' account. As such
additional shares are entitled to dividends, a compounding growth of income oc-
curs. Net income consists of all accrued interest income on Portfolio assets
less the Portfolio's expenses (including accrued expenses and fees payable to
the Adviser) applicable to that dividend period. Realized gains and losses are
reflected in net asset value and are not included in net income.
Each of the other Portfolios will declare and distribute dividends from net in-
vestment income and will distribute its net capital gains, if any, at least an-
nually. Such income and capital gains distributions will be made in shares of
such Portfolios.
The Fund will distribute the return of capital it receives from the REITs in
which the Fund invests. The REITs pay distributions based on cash flow, without
regard to depreciation and amortization. As a result, a portion of the distri-
butions paid to the Fund and subsequently distributed to shareholders is a re-
turn of capital. The final determination of the amount of the Fund's return of
capital distributions for the period will be made after the end of each calen-
dar year.
Each Portfolio of the Fund qualified and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal Rev-
enue Code (the "Code"). If so qualified, each Portfolio will not be subject to
Federal income or excise taxes on its investment company taxable income and net
capital gains to the extent such investment company taxable income and net cap-
ital gains are distributed to the separate accounts of insurance companies
which hold its shares. Under current tax law, capital gains or dividends from
any Portfolio are not currently taxable when left to accumulate within a vari-
able annuity (other than an annuity interest owned by a person who is not a
natural person) or variable life insurance contract. Distributions of net in-
vestment income and net short-term capital gain will be treated as ordinary in-
come and distributions of net long-term capital gain will be treated as long-
term capital gain in the hands of the insurance companies.
Section 817(h) of the Code requires that the investments of a segregated asset
ac-count of an insurance company be "adequately diversified," in accordance
with Treasury Regulations promulgated thereunder, in order for the holders of
the variable annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment generally af-
forded holders of annuities or life insurance policies under the Code. The De-
partment of the Treasury has issued Regulations under section 817(h) which,
among other things, provide the manner in which a segregated asset account will
treat investments in a regulated investment company for purposes of the appli-
cable diversification requirements. Under the Regulations, if a regulated in-
vestment company satisfies certain conditions, a segre-
113
<PAGE>
gated asset account owning shares of the regulated investment company will not
be treated as a single investment for these purposes, but rather the account
will be treated as owning its proportionate share of each of the assets of the
regulated investment company. Each Portfolio plans to satisfy these conditions
at all times so that the shares of each Portfolio owned by a segregated asset
account of a life insurance company will be subject to this treatment under
the Code.
For information concerning federal income tax consequences for the holders of
variable annuity contracts and variable rate insurance policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors of the Fund, the
Adviser is responsible for the investment decisions and the placing of the or-
ders for portfolio transactions for the Fund. Portfolio transactions for the
Money Market Portfolio, the U.S. Government/High Grade Securities Portfolio,
the High-Yield Portfolio, the Short-Term Multi-Market Portfolio, the Global
Bond Portfolio, the North American Government Income Portfolio, the Utility
Income Portfolio and the Global Dollar Government Portfolio occur primarily
with issuers, underwriters or major dealers acting as principals, while trans-
actions for the Premier Growth Portfolio, the Growth and Income Portfolio, the
International Portfolio, the Growth Portfolio, the Worldwide Privatization
Portfolio, the Technology Portfolio and the Quasar Portfolio are normally ef-
fected by brokers, and transactions for the Conservative Investors, the Growth
Investors, Total Return Portfolio and the Real Estate Investment Portfolio are
normally effected through any one or more of the foregoing entities.
The Fund has no obligation to enter into transactions in portfolio securities
with any broker, dealer, issuer, underwriter or other entity. In placing or-
ders, it is the policy of the Fund to obtain the best price and execution for
its transactions. Consistent with the objective of obtaining best execution,
the Fund may use brokers and dealers who provide research, statistical and
other information to the Adviser.
There may be occasions where the transaction cost charged by a broker may be
greater than that which another broker may charge if the Fund determines in
good faith that the amount of such transaction cost is reasonable in relation
to the value of the brokerage and research and statistical services provided
by the executing broker. Consistent with the Rules of Fair Practice of the Na-
tional Association of Securities Dealers, Inc., and subject to seeking best
price and execution, the Fund may consider sales of shares of the Fund as a
factor in the selection of brokers and dealers to enter into portfolio trans-
actions with the Fund.
The Fund may from time to time place orders for the purchase or sale of secu-
rities on an agency basis with Donaldson, Lufkin & Jenrette Securities Corpo-
ration, an affiliate of the Adviser, and with brokers which
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<PAGE>
may have their transactions cleared or settled, or both, by the Pershing Divi-
sion of Donaldson, Lufkin and Jenrette Securities Corporation, for which Don-
aldson, Lufkin and Jenrette Securities Corporation may receive a portion of
the brokerage commission. In such instances, the placement of orders with such
brokers would be consistent with the Fund's objective of obtaining best execu-
tion and would not be dependent upon the fact that Donaldson, Lufkin & Jen-
rette Securities Corporation is an affiliate of the Adviser.
ORGANIZATION
The Fund is a Maryland corporation organized on November 17, 1987. The autho-
rized capital stock of the Fund consists solely of 10,000,000,000 shares of
Common Stock having a par value of $.001 per share, which may, without share-
holder approval, be divided into an unlimited number of series. Such shares
are currently divided into 19 series, one underlying each Portfolio. Shares of
each Portfolio are normally entitled to one vote for all purposes. Generally,
shares of all Portfolios vote as a single series on matters, such as the elec-
tion of Directors, that affect all Portfolios in substantially the same man-
ner. Maryland law does not require a registered investment company to hold an-
nual meetings of shareholders and it is anticipated that shareholder meetings
will be held only when specifically required by federal or state law. Share-
holders have available certain procedures for the removal of Directors. Shares
of each Portfolio are freely transferable, are entitled to dividends as deter-
mined by the Board of Directors and, in liquidation of the Fund, are entitled
to receive the net assets of that Portfolio. Shareholders have no preference,
pre-emptive or conversion rights. In accordance with current law, it is antic-
ipated that an insurance company issuing a variable annuity contract or vari-
able life insurance policy that participates in the Fund will request voting
instructions from contract or policyholders and will vote shares in the sepa-
rate account in accordance with the voting instructions received.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the Americas, New York, New
York 10105, an indirect wholly-owned subsidiary of the Adviser, is the Princi-
pal Underwriter of shares of the Fund.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachu-
setts 02110, acts as Custodian for the securities and cash of the Fund and as
its dividend disbursing agent, but plays no part in deciding on the purchase
or sale of portfolio securities.
REGISTRAR AND DIVIDEND-DISBURSING AGENT
Alliance Fund Services, Inc., an indirect wholly-owned subsidiary of the Ad-
viser, located at 500 Plaza Drive, Secaucus, New Jersey, 07094, acts as the
Fund's registrar and dividend-disbursing agent.
PERFORMANCE INFORMATION
From time to time the Fund advertises its "total return." The Fund's "total
return" is its average annual compounded total return for its most recently
completed one, five, and ten-year periods (or the period since the Fund's in-
ception). The Fund's total re-
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<PAGE>
turn for such a period is computed by finding, through the use of a formula
prescribed by the Commission, the average annual compounded rate of return
over the period that would equate an assumed initial amount invested to the
value of such investment at the end of the period. For purposes of computing
total return, income dividends and capital gains distributions paid on shares
of the Fund are assumed to have been reinvested when paid and the maximum
sales charge applicable to purchases of Fund shares is assumed to have been
paid.
The Fund's total return is not fixed and will fluctuate in response to pre-
vailing market conditions or as a function of the type and quality of the se-
curities in the Fund's portfolio and the Fund's expenses. Total return infor-
mation is useful in reviewing the Fund's performance but such information may
not provide a basis for comparison with bank deposits or other investments
which pay a fixed yield for a stated period of time. An investor's principal
invested in the Fund is not fixed and will fluctuate in response to prevailing
market conditions.
Advertisements quoting performance rankings of the Fund as measured by finan-
cial publications or by independent organizations such as Lipper Analytical
Services, Inc. and Morningstar, Inc., and advertisements presenting the his-
torical record of payments of income dividends by the Fund may also from time
to time be sent to investors or placed in newspapers, magazines such as the
Wall Street Journal, The New York Times, Barrons, Investor's Daily, Money Mag-
azine, Changing Times, Business Week and Forbes or other media on behalf of
the Fund.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to Alliance Fund Services, Inc. at
the address or telephone number shown on the front cover of this Prospectus.
This Prospectus and the Statement of Additional Information which has been in-
corporated by reference herein, does not contain all the information set forth
in the Registration Statement filed by the Fund with the Commission under the
Securities Act of 1933, as amended. Copies of the Registration Statement may
be obtained at a reasonable charge from the Commission or may be examined,
without charge, at the offices of the Commission in Washington, D.C.
This Prospectus does not constitute an offering in any state in which such of-
fering may not lawfully be made.
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<PAGE>
APPENDIX A
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long-term risks appear somewhat larger than the Aaa securi-
ties.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position charac-
terizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcom-
ings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
A-1
<PAGE>
ABSENCE OF RATING: When no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The modi-
fier 1 indicates that the security ranks in the higher end of its generic rat-
ing category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay prin-
cipal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal al-
though it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay inter-
est and repay principal. Whereas it normally exhibits adequate protection pa-
rameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded as having pre-
dominantly speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and CCC the
highest. While such debt will likely
A-2
<PAGE>
have some quality and protective characteristics, these are outweighed by
large uncertainties or major exposures to adverse conditions.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are jeopar-
dized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the ad-
dition of a plus or minus sign to show relative standing within the major rat-
ing categories.
NR: Not rated.
DUFF & PHELPS CREDIT RATING CO.
AAA: Highest credit quality. Risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest, but may vary slightly from time to time because of economic condi-
tions.
A+, A, A-: Protection factors are average but adequate. However, risk fac-
tors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered suf-
ficient for prudent investment. Considerable variability in risk during eco-
nomic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate ac-
cording to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely ac-
cording to economic cycles, industry conditions and/or company fortunes. Po-
tential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal or interest. Protection factors are narrow
and risk can be substantial with unfavorable economic/industry conditions,
and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
A-3
<PAGE>
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit qual-
ity. The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong, al-
though not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future de-
velopments, short-term debt of these issuers is generally rated F- 1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is consid-
ered to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will
fall below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could as-
sist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity through-
out the life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied,
may lead to default.
The ability to meet obligations requires an advantageous business and eco-
nomic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their ul-
timate recovery value
A-4
<PAGE>
in liquidation or reorganization of the obligor. DDD represents the highest po-
tential for recovery on these bonds, and D represents the lowest potential for
recovery.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to in-
dicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA, DDD, DD or D categories.
NR: Indicates that Fitch does not rate the specific issue.
A-5
<PAGE>
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
_________________________________________________________________
P. O. Box 1520, Secaucus, New Jersey 07096-1520
Toll Free (800) 221-5672
_________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
_________________________________________________________________
This Statement of Additional Information is not a
prospectus but supplements and should be read in conjunction with
the Fund's current Prospectus dated May 1, 1997. Copies of such
Prospectus may be obtained by contacting Alliance Fund Services,
Inc. at the address or telephone number shown above.
TABLE OF CONTENTS
PAGE
Introduction
Investment Policies and Restrictions
Money Market Portfolio
Premier Growth Portfolio
Growth and Income Portfolio
U.S. Government/High Grade
Securities Portfolio
High-Yield Portfolio
Total Return Portfolio
International Portfolio
Short-Term Multi-Market Portfolio
and Global Bond Portfolio
North American Government Income
Portfolio
Global Dollar Government Portfolio
Utility Income Portfolio
Conservative Investors Portfolio,
Growth Investors Portfolio and
Growth Portfolio
Worldwide Privatization Portfolio
Technology Portfolio
Quasar Portfolio
Real Estate Investment Portfolio
Other Investment Policies
Management of the Fund
Purchase and Redemption of Shares
Net Asset Value
Portfolio Transactions
<PAGE>
Dividends, Distributions and Taxes
General Information
Report of Independent Accountants
and Financial Statements
Appendix A - Bond and Commercial Paper Ratings A-1
Appendix B - Description of Obligations Issued
or Guaranteed by U.S. Government Agencies
or Instrumentalities B-1
Appendix C - Futures Contracts and Options on
Futures Contracts and Foreign Currencies C-1
Appendix D - Options D-1
Appendix E - Japan E-1
(R): This registered service mark used under license from the
owner, Alliance Capital Management L.P.
2
<PAGE>
_________________________________________________________________
INTRODUCTION
_________________________________________________________________
Alliance Variable Products Series Fund, Inc. ("the
Fund") is an open-end series investment company designed to fund
variable annuity contracts and variable life insurance policies
offered by the separate accounts of certain life insurance
companies. The Fund currently offers an opportunity to choose
among the separately managed pools of assets (the "Portfolios")
described in the Fund's Prospectus which have differing
investment objectives and policies. The Fund currently has
nineteen Portfolios, all of which are described in this Statement
of Additional Information.
_________________________________________________________________
INVESTMENT POLICIES AND RESTRICTIONS
_________________________________________________________________
The following investment policies and restrictions
supplement, and should be read in conjunction with, the
information regarding the investment objectives, policies and
restrictions of each Portfolio set forth in the Fund's
Prospectus. Except as noted below, the investment policies
described below are not fundamental and may be changed by the
Board of Directors of the Fund without the approval of the
shareholders of the affected Portfolio or Portfolios; however,
shareholders will be notified prior to a material change in such
policies.
Whenever any investment policy or restriction states a
minimum or maximum percentage of a Portfolio's assets which may
be invested in any security or other asset, it is intended that
such minimum or maximum percentage limitation be determined
immediately after and as a result of such Portfolio's acquisition
of such security or other asset. Accordingly, any later increase
or decrease in percentage beyond the specified limitations
resulting from a change in value or net assets will not be
considered a violation.
MONEY MARKET PORTFOLIO
GENERAL. The objectives of the Money Market Portfolio
are in the following order of priority: safety of principal,
excellent liquidity and maximum current income to the extent
consistent with the first two objectives. As a matter of
fundamental policy, the Fund pursues its objectives in this
Portfolio by maintaining the Portfolio's assets in high quality
money market securities, all of which at the time of investment
3
<PAGE>
have remaining maturities of one year or less (which maturities
may extend to 397 days). Accordingly, the Portfolio may make the
following investments diversified by maturities and issuers:
1. Marketable obligations of, or guaranteed by, the
United States Government, its agencies or instrumentalities.
These include issues of the U.S. Treasury, such as bills,
certificates of indebtedness, notes and bonds, and issues of
agencies and instrumentalities established under the authority of
an act of Congress. The latter issues include, but are not
limited to, obligations of the Bank for Cooperatives, Federal
Financing Bank, Federal Home Loan Bank, Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage
Association and Tennessee Valley Authority. Some of the
securities are supported by the full faith and credit of the U.S.
Treasury, others are supported by the right of the issuer to
borrow from the U.S. Treasury, and still others are supported
only by the credit of the agency or instrumentality.
2. Certificates of deposit, bankers' acceptances and
interest-bearing savings deposits issued or guaranteed by banks
or savings and loan associations having total assets of more than
$1 billion and which are members of the Federal Deposit Insurance
Corporation. Certificates of deposit are receipts issued by a
depository institution in exchange for the deposit of funds. The
issuer agrees to pay the amount deposited plus interest to the
bearer of the receipt on the date specified on the certificate.
Such certificates may include, for example, those issued by
foreign subsidiaries of such banks which are guaranteed by them.
The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from
short-term credit arrangements designed to enable businesses to
obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most acceptances have maturities of six months or less.
3. Commercial paper, including variable amount master
demand notes, of prime quality rated A-1+ or A-1 by Standard &
Poor's Corporation ("S&P") or Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or, if not rated, issued by domestic
and foreign companies which have an outstanding debt issue rated
AAA or AA by S&P, or Aaa or Aa by Moody's. For a description of
such ratings see Appendix A. Commercial paper consists of short-
term (usually from 1 to 270 days) unsecured promissory notes
4
<PAGE>
issued by corporations in order to finance their current
operations. A variable amount master demand note represents a
direct borrowing arrangement involving periodically fluctuating
rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
4. Repurchase agreements that are collateralized in
full each day by liquid securities of the types listed above.
Repurchase agreements may be entered into with member banks of
the Federal Reserve System or "primary dealers" (as designated by
the Federal Reserve Bank of New York) in U.S. Government
securities or the Fund's Custodian. It is the Portfolio's
current practice, which may be changed at any time without
shareholder approval, to enter into repurchase agreements only
with such primary dealers or the Fund's Custodian. While the
maturities of the underlying collateral may exceed one year, the
term of the repurchase agreement is always less than one year.
Repurchase agreements not terminable within seven days will be
limited to no more than 10% of the Portfolio's total assets.
For additional information regarding repurchase
agreements, see "Other Investment Policies -- Repurchase
Agreements," below.
REVERSE REPURCHASE AGREEMENTS. While the Portfolio has
no current plans to do so, it may enter into reverse repurchase
agreements, which involve the sale of money market securities
held by the Portfolio with an agreement to repurchase the
securities at an agreed-upon price, date and interest payment.
The Fund's Custodian will place cash not available for investment
or securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("Government Securities") or other
liquid high-quality debt securities in a separate account of the
Fund having a value equal to the aggregate amount of the Money
Market Portfolio's commitments in reverse repurchase agreements.
LIQUID RESTRICTED SECURITIES. The Portfolio may
purchase restricted securities eligible for resale under Rule
144A of the Securities Act of 1933, as amended (the "Securities
Act") that are determined by Alliance Capital Management L.P.
(the "Adviser") to be liquid in accordance with procedures
adopted by the Directors. Restricted securities are securities
subject to contractual or legal restrictions on resale, such as
those arising from an issuer's reliance upon certain exemptions
from registration under the Securities Act.
In recent years, a large institutional market has
developed for certain types of restricted securities including,
among others, private placements, repurchase agreements,
commercial paper, foreign securities and corporate bonds and
5
<PAGE>
notes. These instruments are often restricted securities because
they are sold in transactions not requiring registration. For
example, commercial paper issues in which the Portfolio may
invest include, among others, securities issued by major
corporations without registration under the Securities Act in
reliance on the exemption from registration afforded by Section
3(a)(3) of such Act and commercial paper issued in reliance on
the private placement exemption from registration which is
afforded by Section 4(2) of the Securities Act ("Section 4(2)
paper"). Section 4(2) paper is restricted as to disposition under
the Federal securities laws in that any resale must also be made
in an exempt transaction. Section 4(2) paper is normally resold
to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper,
thus providing liquidity. Institutional investors, rather than
selling these instruments to the general public, often depend on
an efficient institutional market in which such restricted
securities can be readily resold in transactions not involving a
public offering. In many instances, therefore, the existence of
contractual or legal restrictions on resale to the general public
does not, in practice, impair the liquidity of such investments
from the perspective of institutional holders.
In 1990, in part to enhance the liquidity in the
institutional markets for restricted securities, the Securities
and Exchange Commission (the "Commission") adopted Rule 144A
under the Securities Act to establish a safe harbor from the
Securities Act's registration requirements for resale of certain
restricted securities to qualified institutional buyers. Section
4(2) paper that is issued by a company that files reports under
the Securities Exchange Act of 1934 is generally eligible to be
resold in reliance on the safe harbor of Rule 144A. Pursuant to
Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted
securities and the ability to liquidate an investment in order to
satisfy share redemption orders on a timely basis. An
insufficient number of qualified institutional buyers interested
in purchasing certain restricted securities held by the
Portfolio, however, could affect adversely the marketability of
such portfolio securities and the Portfolio might be unable to
dispose of such securities promptly or at reasonable prices. Rule
144A has already produced enhanced liquidity for many restricted
securities, and market liquidity for such securities may continue
to expand as a result of Rule 144A and the consequent inception
of the PORTAL System sponsored by the National Association of
Securities Dealers, Inc., an automated system for the trading,
clearance and settlement of unregistered securities. The
Portfolio's investments in Rule 144A eligible securities are not
subject to the limitations described above on securities issued
under Section 4(2).
6
<PAGE>
The Fund's Directors have the ultimate responsibility
for determining whether specific securities are liquid or
illiquid. The Directors have delegated the function of making
day-to-day determinations of liquidity to the Adviser, pursuant
to guidelines approved by the Directors. The Adviser takes into
account a number of factors in determining whether a restricted
security being considered for purchase is liquid, including at
least the following:
(i) the frequency of trades and quotations for the
security;
(ii) the number of dealers making quotations to
purchase or sell the security;
(iii) the number of other potential purchasers of
the security;
(iv) the number of dealers undertaking to make a
market in the security;
(v) the nature of the security (including its
unregistered nature) and the nature of the
marketplace for the security (e.g., the time
needed to dispose of the security, the method
of soliciting offers and the mechanics of
transfer); and
(vi) any applicable Securities and Exchange
Commission interpretation or position with
respect to such types of securities.
Following the purchase of a restricted security by the
Portfolio, the Adviser monitors continuously the liquidity of
such security and reports to the Directors regarding purchases of
liquid restricted securities.
MONEY MARKET REQUIREMENTS. While there are many kinds
of short-term securities used by money market investors, the
Portfolio, in keeping with its primary investment objective of
safety of principal, restricts its portfolio to the types of
investments listed above. Of note, the Portfolio does not invest
in issues of savings and loan associations, letters of credit, or
issues of foreign banks. The Portfolio may make investments in
certificates of deposit issued by, and time deposits maintained
at, foreign branches of domestic banks specified above, prime
quality dollar-denominated commercial paper issued by foreign
companies meeting the rating criteria specified above, and in
certificates of deposit and bankers' acceptances denominated in
U.S. dollars that are issued by U.S. branches of foreign banks
having total assets of at least $1 billion that are believed by
7
<PAGE>
the Adviser to be of quality equivalent to that of other such
investments in which the Portfolio may invest. To the extent
that the Portfolio invests in such instruments, consideration is
given to their domestic marketability, the lower reserve
requirements generally mandated for overseas banking operations,
the possible impact of interruptions in the flow of international
currency transactions, potential political and social instability
or expropriation, imposition of foreign taxes, less government
supervision of issuers, difficulty in enforcing contractual
obligations and lack of uniform accounting standards. As even
the safest of securities involve some risk, there can be no
assurance, as is true with all investment companies, that the
Portfolio's objective will be achieved. The market value of the
Portfolio's investments tends to decrease during periods of
rising interest rates and to increase during intervals of falling
rates.
The Money Market Portfolio intends to comply with Rule
2a-7 under the Investment Company Act of 1940, as amended (the
"1940 Act"), as amended from time to time, including the
diversity, quality and maturity conditions imposed by the Rule.
Accordingly, in any case in which there is a variation between
the conditions imposed by the Rule and the Portfolio's investment
policies and restrictions, the Portfolio will be governed by the
more restrictive of the two requirements.
Currently, pursuant to Rule 2a-7, the Money Market
Portfolio may invest only in "eligible securities," as that term
is defined in the Rule. Generally, an eligible security is a
security that (i) is denominated in U.S. Dollars and has a
remaining maturity of 397 days or less; (ii) is rated, or is
issued by an issuer with short-term debt outstanding that is
rated, in one of the two highest rating categories by two
nationally recognized statistical rating organizations ("NRSROs")
or, if only one NRSRO has issued a rating, by that NRSRO; and
(iii) has been determined by the Adviser to present minimal
credit risks pursuant to procedures approved by the Board of
Directors. A security that originally had a maturity of greater
than 397 days is an eligible security if the issuer has
outstanding short-term debt that would be an eligible security.
Unrated securities may also be eligible securities if the Adviser
determines that they are of comparable quality to a rated
eligible security pursuant to guidelines approved by the Board of
Directors. A description of the ratings of some NRSROs appears
in Appendix A attached hereto.
Under Rule 2a-7, the Money Market Portfolio may not
invest more than 5% of its assets in the securities of any one
issuer other than the United States Government, its agencies and
instrumentalities. In addition, the Portfolio may not invest in
a security that has received, or is deemed comparable in quality
8
<PAGE>
to a security that has received, the second highest rating by the
requisite number of NRSROs (a "second tier security") if
immediately after the acquisition thereof that Portfolio would
have invested more than (A) the greater of 1% of its total assets
or one million dollars in securities issued by that issuer which
are second tier securities, or (B) five percent of its total
assets in second tier securities.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Money Market Portfolio, supplement
those set forth above and in the Prospectus and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase any security which has a maturity date
more than one year from the date of the Portfolio's purchase;
2. Make investments for the purpose of exercising
control;
3. Purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization;
4. Invest in real estate (other than money market
securities secured by real estate or interests therein or money
market securities issued by companies which invest in real estate
or interests therein), commodities or commodity contracts,
interests in oil, gas and other mineral exploration or other
development programs;
5. Make short sales of securities or maintain a short
position or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof; or
6. Purchase or retain securities of any issuers if
those officers and directors of the Fund and officers and
directors of the Adviser who own individually more than 1/2% of
the outstanding securities of such issuer together own more than
5% of the securities of such issuer.
PREMIER GROWTH PORTFOLIO
GENERAL. The objective of the Premier Growth Portfolio
is capital growth rather than current income. Since investments
will be made based upon their potential for capital appreciation,
current income will be incidental to the objective of capital
growth. The Portfolio will seek to achieve its objective through
aggressive investment policies and, therefore, is not intended
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for investors whose principal objective is assured income or
conservation of capital. Ordinarily, the annual portfolio
turnover rate may be in excess of 100%. For the fiscal years
ended December 31, 1995 and December 31, 1996, the portfolio
turnover rates were 97% and 32%, respectively.
In seeking its investment goal, the Portfolio will
invest predominantly in the equity securities (common stocks,
securities convertible into common stocks and rights and warrants
to subscribe for or purchase common stocks) of a limited number
of large, carefully selected, high-quality American companies
that, in the judgment of the Adviser, are likely to achieve
superior earnings growth. The Portfolio's investments in the 25
of these companies most highly regarded at any point in time by
the Adviser will usually constitute approximately 70% of the
Portfolio's net assets. Normally, approximately 40 companies
will be represented in the Portfolio's investment portfolio. The
Portfolio thus differs from more typical equity mutual funds by
investing most of its assets in a relatively small number of
intensively researched companies.
The Adviser expects the average weighted market
capitalization of companies represented in the Portfolio's
portfolio (that is the number of a company's shares outstanding
multiplied by the price per share) to normally be in the range of
or exceed the average weighted market capitalization of companies
comprising the Standard & Poor's 500 Composite Stock Price Index,
a widely recognized unmanaged index of market activity based upon
the aggregate performance of a selected portfolio of publicly
traded common stocks, including monthly adjustments to reflect
the reinvestment of dividends and other distributions which
reflects the total return of securities comprising the Index,
including changes in market prices as well as accrued investment
income, which is presumed to be reinvested. Investments will be
made based upon their potential for capital appreciation.
Current income will be incidental to that objective. Because of
the market risks inherent in any investment, the selection of
securities on the basis of their appreciation possibilities
cannot ensure against possible loss in value, and there is, of
course, no assurance that the Portfolio's investment objective
will be met.
The Adviser expects that, under normal circumstances,
the Portfolio will invest at least 85% of the value of its total
assets in the equity securities of American companies (except
when in a temporary defensive position). The Portfolio defines
American companies to be entities (i) that are organized under
the laws of the United States and have their principal office in
the United States, and (ii) the equity securities of which are
traded principally in the United States securities markets.
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The Portfolio may invest in both listed and unlisted
domestic and foreign securities, and in restricted securities,
and in other assets having no ready market, but not more than 10%
of the Portfolio's total assets may be invested in all such
restricted or not readily marketable assets at any one time.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act, or
pursuant to Rule 144 promulgated under such Act. Where
registration is required, the Portfolio may be obligated to pay
all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under
an effective registration statement. If during such a period
adverse market conditions were to develop, the Portfolio might
obtain a less favorable price than that which prevailed when it
decided to sell. Restricted securities and other not readily
marketable assets will be valued in such a manner as the Board of
Directors of the Fund in good faith deems appropriate to reflect
their fair market value. See "Other Investment Policies --
Illiquid Securities" below, for a more detailed discussion of the
Portfolio's investment policy on restricted securities and
securities with legal or contractual restrictions on resale.
SPECIAL SITUATIONS. The Portfolio will invest in
special situations from time to time. A special situation arises
when, in the opinion of the Adviser, the securities of a
particular company will, within a reasonably estimable period of
time, be accorded market recognition at an appreciated value
solely by reason of a development particularly or uniquely
applicable to that company, and regardless of general business
conditions or movements of the market as a whole. Developments
creating special situations might include, among others,
liquidations, reorganizations, recapitalizations or mergers,
material litigation, technological breakthroughs and new
management or management policies. Although large and well-known
companies may be involved, special situations often involve much
greater risk than is inherent in ordinary investment securities.
SHORT SALES. The Portfolio may not sell securities
short, except that it may make short sales "against the box."
Such sales may be used by the Portfolio to defer the realization
of gain or loss for federal income tax purposes on securities
then owned by the Portfolio. Gains or losses will be short- or
long-term for federal income tax purposes depending upon the
length of time the securities are held by the Portfolio before
closing out the short sales by delivery to the lender. The
Portfolio may, in certain instances, realize short-term gains or
losses on short sales "against the box" by covering the short
position through a subsequent purchase.
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OPTIONS. The Portfolio may write call options and may
purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. A call option written by the Portfolio
is "covered" if the Portfolio owns the underlying security
covered by the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or
for additional cash, U.S. Government Securities or other liquid
high grade debt obligation held in a segregated account by the
Fund's Custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the
Portfolio holds a call on the same security and in the same
principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in
cash in a segregated account with the Fund's Custodian. The
premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest
rates.
The writing of call options will, therefore, involve a
potential loss of opportunity to sell securities at high prices.
In exchange for the premium received by it, the writer of a fully
collateralized call option assumes the full downside risk of the
securities subject to such option. In addition, the writer of the
call gives up the gain possibility of the stock protecting the
call. Generally, the opportunity for profit from the writing of
options occurs when the stocks involved are lower priced or
volatile, or both. While an option that has been written is in
force, the maximum profit that may be derived from the optioned
stock is the premium less brokerage commissions and fees.
It is the Portfolio's policy not to write a call option
if the premium to be received by the Portfolio in connection with
such options would not produce an annualized return of at least
15% of the then market value of the securities subject to the
option. Commissions, stock transfer taxes and other expenses of
the Portfolio must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio will ordinarily be sold
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either on a national securities exchange or through put and call
dealers, most, if not all, of which are members of a national
securities exchange on which options are traded, and will in such
case be endorsed or guaranteed by a member of a national
securities exchange or qualified broker-dealer, which may be
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate
of the Adviser. The endorsing or guaranteeing firm requires that
the option writer (in this case the Portfolio) maintain a margin
account containing either corresponding stock or other equity as
required by the endorsing or guaranteeing firm.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such
securities) would exceed 15% of the Portfolio's total assets.
The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed
to call options written by the Portfolio which, at the time of
sale by the Portfolio, have a remaining term of more than 100
days.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Growth Portfolio, supplement those
set forth above and in the Prospectus and may not be changed
without Shareholder Approval, as defined under the caption
"General Information," below.
The Portfolio may not:
1. Write put options;
2. Make investments for the purpose of exercising
control;
3. Except as permitted in connection with short sales
of securities "against the box" described under the heading
"Short Sales" above, make short sales of securities;
4. Buy or hold securities of any issuer if any officer
or director of the Fund, the Adviser or any officer, director or
10% shareholder of the Adviser owns individually 1/2 of 1% of a
class of securities of such issuer, and such persons together own
beneficially more than 5% of such securities; or
5. Buy or sell any real estate or interests therein,
commodities or commodity contracts, including commodity futures
contracts.
GROWTH AND INCOME PORTFOLIO
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GENERAL. The Growth and Income Portfolio's objective is
reasonable current income and reasonable opportunity for
appreciation through investments primarily in dividend-paying
common stocks of good quality. It may invest whenever the
economic outlook is unfavorable for common stock investments in
other types of securities, such as bonds, convertible bonds,
preferred stocks and convertible preferred stocks. The Portfolio
may also write covered call options listed on domestic securities
exchanges. The Portfolio engages primarily in holding securities
for investment and not for trading purposes. Purchases and sales
of portfolio securities are made at such times and in such
amounts as are deemed advisable in the light of market, economic
and other conditions, irrespective of the volume of portfolio
turnover. Ordinarily the annual portfolio turnover rate will not
exceed 100%. The portfolio turnover rates for the fiscal years
ended December 31, 1995 and December 31, 1996 were 150% and 87%,
respectively.
The Portfolio may invest in foreign securities. Although
not a fundamental policy, the Portfolio will not make any such
investments unless such securities are listed on a national
securities exchange.
It is the Portfolio's policy not to concentrate its
investments in any one industry by investment of more than 25% of
the value of its total assets in such industry, underwrite
securities issued by other persons, purchase any securities as to
which it might be deemed a statutory underwriter under the
Securities Act, purchase or sell commodities or commodity
contracts or engage in the business of purchasing and selling
real estate.
OPTIONS. The Portfolio may write covered call options,
provided that the option is listed on a domestic securities
exchange and that no option will be written if, as a result, more
than 25% of the Portfolio's assets are subject to call options.
For a discussion of options, see "Premier Growth Portfolio -
Options" above.
The Portfolio will purchase call options only to close
out a position in an option written by it. In order to close out
a position, the Portfolio will make a "closing purchase
transaction" if such is available. In such a transaction, the
Portfolio will purchase a call option on the same security option
which it has previously written. When a security is sold from
the Portfolio against which a call option has been written, the
Portfolio will effect a closing purchase transaction so as to
close out any existing call option on that security. The
Portfolio will realize a profit or loss from a closing purchase
transaction if the amount paid to purchase a call option is less
or more than the amount received as a premium for the writing
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<PAGE>
thereof. A closing purchase transaction cannot be made if
trading in the option has been suspended.
The premium received by the Portfolio upon writing a
call option will increase the Portfolio's assets, and a
corresponding liability will be recorded and subsequently
adjusted from day to day to the current value of the option
written. For example, if the current value of the option exceeds
the premium received, the excess would be an unrealized loss and,
conversely, if the premium exceeds the current value, such excess
would be an unrealized gain. The current value of the option
will be the last sales price on the principal exchange on which
the option is traded or, in the absence of any transactions, the
mean between the closing bid and asked price.
INVESTMENT RESTRICTIONS. The following investment
restrictions, which are applicable to the Growth and Income
Portfolio, supplement those set forth above and in the Prospectus
and may not be changed without shareholder approval, as defined
under the caption "General Information," below.
The Portfolio may not:
1. Purchase the securities of any other investment
company except in a regular transaction on the open market;
2. Purchase the securities of any issuer if directors
or officers of the Fund or certain other interested persons own
more than 5% of such securities; or
3. Invest in the securities of any company for the
purpose of exercising control of management.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
The investment objective of the U.S. Government/High
Grade Securities Portfolio is high current income consistent with
preservation of capital. In seeking to achieve this objective,
the Portfolio will invest principally in a portfolio of (i)
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities") and
repurchase agreements pertaining to U.S. Government Securities
and (ii) other high grade debt securities rated AAA, AA or A by
S&P or Aaa, Aa or A by Moody's or that have not received a rating
but are determined to be of comparable quality by the Adviser.
As a fundamental investment policy, the Portfolio will invest at
least 65% of its total assets in these types of securities,
including the securities held subject to repurchase agreements.
The Portfolio will utilize certain other investment techniques,
including options and futures contracts, intended to enhance
income and reduce market risk. The Fund's Custodian will place
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<PAGE>
cash not available for investment or U.S. Government Securities
or other liquid high-quality debt securities in a separate
account of the Fund having a value equal to the aggregate amount
of any options transactions which may be entered into by the
Portfolio. The Portfolio is designed primarily for long-term
investors and investors should not consider it a trading vehicle.
As with all investment company portfolios, there can be no
assurance that the Portfolio's objective will be achieved.
The Portfolio is subject to the diversification
requirements prescribed by the U.S. Treasury Department which,
among other things, limits the Portfolio to investing no more
than 55% of its total assets in any one investment. For this
purpose, all securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities are
considered a single investment. Accordingly, the U.S.
Government/High Grade Securities Portfolio will limit its
purchases of U.S. Government Securities to 55% of the total
assets of the Portfolio. Consistent with this limitation, the
Portfolio will, as a matter of fundamental policy, invest at
least 45% of its total assets in U.S. Government Securities.
Nevertheless, the Portfolio reserves the right to modify the
percentage of its investments in U.S. Government Securities in
order to comply with all applicable tax requirements.
U.S. GOVERNMENT SECURITIES. Securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities, include: (i) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of
issuance, U.S. Treasury bills (maturity of one year or less),
U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years),
all of which are backed by the full faith and credit of the
United States; and (ii) obligations issued or guaranteed by U.S.
Government agencies or instrumentalities, including government
guaranteed mortgage-related securities, some of which are backed
by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage
Association), some of which are supported by the right of the
issuer to borrow from the U.S. Government (e.g., obligations of
Federal Home Loan Banks), and some of which are backed only by
the credit of the issuer itself (e.g., obligations of the Student
Loan Marketing Association). See Appendix B hereto for a
description of obligations issued or guaranteed by U.S.
Government agencies or instrumentalities.
U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES-
- - GENERAL. Mortgages backing the U.S. Government guaranteed
mortgage-related securities purchased by the Portfolio include,
among others, conventional 30 year fixed rate mortgages,
graduated payment mortgages, 15 year mortgages and adjustable
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<PAGE>
rate mortgages. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed
through to the holders of the securities in the form of periodic
payments of interest, principal and prepayments (net of a service
fee). Prepayments occur when the holder of an individual
mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-
backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgages vary, it
is not possible to predict accurately the realized yield or
average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium
(i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not
be fully amortized at the time the obligation is repaid. The
opposite is true for pass-throughs purchased at a discount. The
Portfolio may purchase mortgage-related securities at a premium
or at a discount. Principal and interest payments on the
mortgage-related securities are government guaranteed to the
extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or
of the Portfolio's shares of Common Stock.
GNMA CERTIFICATES. Certificates of the Government
National Mortgage Association ("GNMA Certificates") are mortgage-
related securities, which evidence an undivided interest in a
pool or pools of mortgages. GNMA Certificates that the Portfolio
may purchase are the "modified pass-through" type, which entitle
the holder to receive timely payment of all interest and
principal payments due on the mortgage pool, net of fees paid to
the "issuer" and GNMA, regardless of whether or not the
mortgagors actually make mortgage payments when due.
The National Housing Act authorizes GNMA to guarantee
the timely payment of principal and interest on securities backed
by a pool or mortgages insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full
faith and credit of the United States Government. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by
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mortgagors and mortgage foreclosures will usually result in the
return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee,
except to the extent that the Portfolio has purchased the
certificates above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of
Title III of the Emergency Home Finance Act of 1970. Its purpose
is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage-related pass-
through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage securities ("GMCs").
PCs resemble GNMA Certificates in that each PC represents a pro
rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal.
GMCs also represent a PRO RATA interest in a pool of
mortgages. However, these instruments pay interest semi-annually
and return principal once a year in guaranteed minimum payments.
The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith
and credit of the United States.
FNMA SECURITIES. The Federal National Mortgage
Association ("FNMA") was established in 1938 to create a
secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all
interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest and principal
on FNMA Certificates. The FNMA guarantee is not backed by the
full faith and credit of the United States.
ZERO COUPON TREASURY SECURITIES. The Portfolio may
invest in "zero coupon" Treasury securities, which are U.S.
Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or certificates
representing interests in such stripped debt obligations and
coupons. A zero coupon security is a debt obligation that does
not entitle the holder to any periodic payments prior to maturity
but; instead, is issued and traded at a discount from its face
amount. The discount varies depending on the time remaining
until maturity, prevailing interest rates, liquidity of the
security and perceived credit quality of the issuer. The market
prices of zero coupon securities are generally more volatile than
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those of interest-bearing securities, and are likely to respond
to changes in interest rates to a greater degree than otherwise
comparable securities that do pay periodic interest. Current
federal tax law requires that a holder (such as the Portfolio) of
a zero coupon security accrue a portion of the discount at which
the security was purchased as income each year, even though the
holder receives no interest payment on the security during the
year. As a result, in order to make the distributions necessary
for the Portfolio not to be subject to federal income or excise
taxes, the Portfolio might be required to pay out as an income
distribution each year an amount, obtained by liquidation of
portfolio securities if necessary, greater than the total amount
of cash that the Portfolio has actually received as interest
during the year. The Adviser believes, however, that it is
highly unlikely that it would be necessary to liquidate any
portfolio securities for this purpose.
Currently the only U.S. Treasury security issued without
coupons is the Treasury bill. Although the U.S. Treasury does
not itself issue treasury notes and bonds without coupons, under
the U.S. Treasury STRIPS program interest and principal on
certain long term treasury securities may be maintained
separately in the Federal Reserve book entry system and may be
separately traded and owned. However, in the last few years a
number of banks and brokerage firms have separated ("stripped")
the principal portions ("corpus") from the coupon portions of the
U.S. Treasury bonds and notes and sold them separately in the
form of receipts or certificates representing undivided interests
in these instruments (which instruments are generally held by a
bank in a custodial or trust account). The staff of the
Commission has indicated that these receipts or certificates
representing stripped corpus interests in U.S. Treasury
securities sold by banks and brokerage firms should be considered
as securities issued by the bank or brokerage firm involved and,
therefore, should not be included in the Portfolio's
categorization of U.S. Government Securities for purposes of the
Portfolio's investing at least 45% of its assets in U.S.
Government Securities. The Fund disagrees with the staff's
interpretation but has undertaken, until final resolution of the
issue, to include the Portfolio's purchases of such securities in
the non-U.S. Government Securities portion of the Portfolio's
investments which may be as much as 55% of its total assets.
However, if such securities are deemed to be U.S. Government
Securities, the Portfolio will include them as such for purposes
of determining the 55% limitation on U.S. Government Securities.
REPURCHASE AGREEMENTS. The Portfolio may enter into
repurchase agreements pertaining to U.S. Government Securities
with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York)
in such securities. Currently the Portfolio plans to enter into
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<PAGE>
repurchase agreements only with the Fund's Custodian and such
primary dealers. For a general discussion of repurchase
agreements, see "Other Investment Policies -- Repurchase
Agreements," below.
GENERAL. U.S. Government Securities do not generally
involve the credit risks associated with other types of interest
bearing securities. As a result, the yields available from U.S.
Government Securities are generally lower than the yields
available from other interest-bearing securities. Like other
fixed-income securities, however, the values of U.S. Government
Securities change as interest rates fluctuate. When interest
rates decline, the values of U.S. Government Securities can be
expected to increase and when interest rates rise, the values of
U.S. Government Securities can be expected to decrease.
HIGH GRADE DEBT SECURITIES. High grade debt securities
which, together with U.S. Government Securities, will constitute
at least 65% of the Portfolio's assets include:
1. Debt securities which are rated AAA, AA, or A by
S&P or Aaa, Aa or A by Moody's;
2. Obligations of, or guaranteed by, national or state
bank holding companies, which obligations, although not rated as
a matter of policy by either S&P or Moody's, are rated AAA, AA or
A by Fitch Investors Services, Inc. ("Fitch");
3. Commercial paper rated A-1+, A-1, A-2 or A-3 by S&P
or Prime-1, Prime-2 or Prime-3 by Moody's; and
4. Bankers' acceptances or negotiable certificates of
deposit issued by banks rated AAA, AA or A by Fitch.
INVESTMENT IN HIGH GRADE DEBT SECURITIES. With respect
to the Portfolio's investment in high grade debt securities, it
will not acquire common stocks or equities exchangeable for or
convertible into common stock or rights or warrants to subscribe
for or purchase common stock, except that with respect to
convertible debt securities, the Portfolio may acquire common
stock through the exercise of conversion rights in situations
where it believes such exercise is in the best interest of the
Portfolio and its shareholders. In such event, the Portfolio
will sell the common stock resulting from such conversion as soon
as practical. The Portfolio may acquire debt securities and
nonconvertible preferred stock which may have voting rights, but
in no case will the Portfolio acquire more than 10% of the voting
securities of any one issuer. The relative size of the
Portfolio's investments in any grade or type of security will
vary from time to time. Critical factors which are considered in
the selection of securities relate to other investment
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alternatives as well as trends in the determinants of interest
rates, corporate profits and management capabilities and
practices.
RESTRICTED SECURITIES. Consistent with its investment
restrictions, the Portfolio may acquire restricted securities.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act or
pursuant to Rule 144 promulgated under such Act. Where
registration is required, the Portfolio may be obligated to pay
all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under
an effective registration statement. If during such a period
adverse market conditions were to develop, the Portfolio might
obtain a less favorable price than prevailed when it decided to
sell. Restricted securities will be valued in such manner as the
Board of Directors of the Fund in good faith deem appropriate to
reflect their fair market value. If through the appreciation of
restricted securities or the depreciation of unrestricted
securities, the Portfolio should be in a position where more than
10% of the value of its total assets is invested in illiquid
assets, including restricted securities, the Portfolio will take
appropriate steps to protect liquidity. See "Other Investment
Policies -- Illiquid Securities" below, for a more detailed
discussion of the Portfolio's investment policy in securities
with legal or contractual restrictions on resale.
OTHER SECURITIES. While the Portfolio's investment
strategy emphasizes U.S. Government Securities and high grade
debt securities, the Portfolio may, consistent with its
investment objectives, invest up to 35% of its total assets in
securities other than U.S. Government Securities and high grade
debt securities, including (i) investment grade corporate debt
securities of a type other than the high grade debt securities
described above (including collateralized mortgage obligations),
(ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of
more than $1 billion and which are members of the Federal Deposit
Insurance Corporation, and (iii) put and call options, futures
contracts and options thereon. Investment grade debt securities
are those rated Baa or higher by Moody's or BBB or higher by S&P
or, if not so rated, of equivalent investment quality in the
opinion of the Adviser. Securities rated Baa by Moody's or BBB
by S&P normally provide higher yields but are considered to have
speculative characteristics. Sustained periods of deteriorating
economic conditions or rising interest rates are more likely to
lead to a weakening in the issuer's capacity to pay interest and
repay principal than in the case of higher-rated securities. See
Appendix A hereto for a description of corporate debt ratings.
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COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized
mortgage obligations ("CMOs") are debt obligations issued
generally by finance subsidiaries or trusts that are secured by
mortgage-backed certificates, including, in many cases, GNMA
Certificates, FHLMC Certificates and FNMA Certificates, together
with certain funds and other collateral.
Scheduled distributions on the mortgage-backed
certificates pledged to secure the CMOs, together with certain
funds and other collateral, will be sufficient to make timely
payments of interest on the CMOs and to retire the CMOs not later
than their stated maturity. Since the rate of payment of
principal of the CMOs will depend on the rate of payment
(including prepayments) of the principal of the underlying
mortgage-backed certificates, the actual maturity of the CMOs
could occur significantly earlier than their stated maturity.
The CMOs may be subject to redemption under certain
circumstances. CMOs bought at a premium (i.e., a price in excess
of principal amount) may involve additional risk of loss of
principal in the event of unanticipated prepayments of the
underlying mortgages because the premium may not have been fully
amortized at the time the obligation is repaid.
Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure the CMOs may be
guaranteed by GNMA, FHLMC, or FNMA, the CMOs represent
obligations solely of the issuer and are not insured or
guaranteed by GNMA, FHLMC, FNMA or any other governmental agency,
or by any other person or entity. The issuers of CMOs typically
have no significant assets other than those pledged as collateral
for the obligations.
The staff of the Commission currently takes the
position, in a reversal of its former view, that certain issuers
of CMOs are not investment companies for purposes of Section
12(d)(i) of the 1940 Act, which limits the ability of one
investment company to invest in another investment company. The
staff of the Commission has determined that certain issuers of
CMOs are investment companies for purposes of the 1940 Act. In
reliance on a recent staff interpretation, the Portfolio's
investments in certain qualifying CMOs, including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits
(REMICs), are not subject to the 1940 Act's limitation on
acquiring interests in other investment companies. In order to
be able to rely on the staff's interpretation, the CMOs and
REMICs must be unmanaged, fixed-asset issuers, that (a) invest
primarily in mortgage-backed securities, (b) do not issue
redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the 1940 Act, and (d) are
not registered or regulated under the 1940 Act as investment
companies. To the extent that the Portfolio selects CMOs or
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REMICs that do not meet the above requirements, the Portfolio may
not invest more than 10% of its assets in all such entities and
may not acquire more than 3% of the voting securities of any
single such entity.
INVESTMENT PRACTICES.
OPTIONS ON U.S. GOVERNMENT SECURITIES. In an effort to
increase current income and to reduce fluctuations in net asset
value, the Portfolio intends to write covered put and call
options and purchase put and call options on U.S. Government
Securities that are traded on United States securities exchanges
and over the counter. The Portfolio may also write such call
options that are not covered for cross-hedging purposes. There
are no specific percentage limitations on the Portfolio's
investments in options.
The Portfolio intends to write call options for cross-
hedging purposes. A call option is for cross-hedging purposes if
it is designed to provide a hedge against a decline in value in
another security which the Portfolio owns or has the right to
acquire. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with the Custodian,
cash or U.S. Governmental Securities in an amount not less than
the market value of the underlying security, marked to market
daily.
In purchasing a call option, the Portfolio would be in a
position to realize a gain if, during the option period, the
price of the security increased by an amount in excess of the
premium paid. It would realize a loss if the price of the
security declined or remained the same or did not increase during
the period by more than the amount of the premium. In purchasing
a put option, the Portfolio would be in a position to realize a
gain if, during the option period, the price of the security
declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained
the same or did not decrease during that period by more than the
amount of the premium. If a put or call option purchased by the
Portfolio were permitted to expire without being sold or
exercised, its premium would be lost by the Portfolio.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. The risk
involved in writing a put option is that there could be a
decrease in the market value of the underlying security caused by
rising interest rates or other factors. If this occurred, the
option could be exercised and the underlying security would then
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be sold to the Portfolio at a higher price than its current
market value. The risk involved in writing a call option is that
there could be an increase in the market value of the underlying
security caused by declining interest rates or other factors. If
this occurred, the option could be exercised and the underlying
security would then be sold by the Portfolio at a lower price
than its current market value. The Portfolio retains the premium
received from writing a put or call option whether or not the
option is exercised.
Over-the-counter options are purchased or written by the
Portfolio in privately negotiated transactions. Such options are
illiquid and it may not be possible for the Portfolio to dispose
of any option it has purchased or terminate its obligations under
an option it has written at a time when the Adviser believes it
would be advantageous to do so.
The Portfolio intends to write covered put and call
options and purchase put and call options on U.S. Government
Securities that are traded on United States securities exchanges
and over the counter. The Portfolio also intends to write call
options that are not covered for cross-hedging purposes.
For additional information on the use, risks and costs
of options, see Appendix D.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or contracts based on
financial indices including any index of U.S. Government
Securities ("futures contracts") and may purchase and write
options to buy or sell futures contracts ("options on futures
contracts"). Options on futures contracts to be written or
purchased by the Portfolio will be traded on U.S. exchanges or
over the counter. These investment techniques will be used only
to hedge against anticipated future changes in interest or
exchange rates which otherwise might either adversely affect the
value of the Portfolio's securities or adversely affect the
prices of securities which the Portfolio intends to purchase at a
later date. The successful use of such instruments draws upon
the Adviser's special skills and experience with respect to such
instrumentalities and usually depends on the Adviser's ability to
forecast interest rate movements correctly. Should interest
rates move in an unexpected manner, the Portfolio may not achieve
the anticipated benefits of futures contracts or options on
futures contracts or may realize losses and thus will be in a
worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements
in the price of securities hedged or used for cover will not be
perfect.
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A "sale" of a futures contract means the acquisition of
a contractual obligation to deliver the securities called for by
the contract at a specified price on a specified date. A
"purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. The
purchaser of a futures contract on an index agrees to take or
make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on
the expiration date of the contract and the price at which the
contract was originally struck.
The Portfolio will enter into futures contracts which
are based on debt securities that are backed by the full faith
and credit of the U.S. Government, such as long-term U.S.
Treasury bonds, Treasury notes, GNMA modified pass-through
mortgage-backed securities and three-month U.S. Treasury bills.
The Portfolio may also enter into futures contracts which are
based on non-U.S. Government bonds.
The Portfolio's ability to engage in the options and
futures strategies described above will depend on the
availability of liquid markets in such instruments. Markets in
options and futures with respect to U.S. Government Securities
are relatively new and still developing. It is impossible to
predict the amount of trading interest that may exist in various
types of options or futures. Therefore no assurance can be given
that the Portfolio will be able to utilize these instruments
effectively for the purposes set forth above. Furthermore, the
Portfolio's ability to engage in options and futures transactions
may be limited by tax considerations.
It is the policy of the Portfolio that futures contracts
and options on futures contracts only be used as a hedge and not
for speculation. In addition to this requirement, the Portfolio
adheres to two percentage restrictions on the use of futures
contracts. The first restriction is that the Portfolio will not
enter into any futures contracts and options on futures contracts
if immediately thereafter the amount of initial margin deposits
on all the futures contracts of the Portfolio and premiums paid
on options on futures contracts would exceed 5% of the market
value of the total assets of the Portfolio. The second
restriction is that the aggregate market value of the futures
contracts held by the Portfolio not exceed 50% of the market
value of the total assets of the Portfolio. Neither of these
restrictions will be changed by the Portfolio without considering
the policies and concerns of the various applicable federal and
state regulatory agencies.
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For additional information on the use, risks and costs
of future contracts and options on future contracts, see
Appendix C.
LENDING OF PORTFOLIO SECURITIES. In order to increase
income, the Portfolio may from time to time lend its securities
to brokers, dealers and financial institutions and receive
collateral in the form of cash or U.S. Government Securities.
Under the Portfolio's procedures, collateral for such loans must
be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities (including
interest accrued on the loaned securities). The interest
accruing on the loaned securities will be paid to the Portfolio
and the Portfolio will have the right, on demand, to call back
the loaned securities. The Portfolio may pay fees to arrange the
loans. The Portfolio will not lend its securities in excess of
30% of the value of its total assets, nor will the Portfolio lend
its securities to any officer, director, employee or affiliate of
the Fund or the Adviser.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The
Portfolio may enter into forward commitments for the purchase or
sale of securities. Such transactions may include purchases on a
"when-issued" basis or purchases or sales on a "delayed delivery"
basis. In some cases, a forward commitment may be conditioned
upon the occurrence of a subsequent event, such as approval and
consummation of a merger, corporate reorganization or debt
restructuring (i.e., a "when, as and if issued" trade).
When such transactions are negotiated, the price, which
is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities
take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements
beyond two months may be negotiated. Securities purchased or
sold under a forward commitment are subject to market
fluctuation, and no interest (or dividend) accrues to the
purchaser prior to the settlement date. At the time the
Portfolio enters into a forward commitment, it will record the
transaction and thereafter reflect the value of the security
purchased or, if a sale, the proceeds to be received, in
determining its net asset value. Any unrealized appreciation or
depreciation reflected in such valuation of a "when, as and if
issued" security would be cancelled in the event that the
required condition did not occur and the trade was cancelled.
The use of when-issued transactions and forward
commitments enables the Portfolio to protect against anticipated
changes in interest rates and prices. For instance, in periods
of rising interest rates and falling bond prices, the Portfolio
might sell its securities on a forward commitment basis to limit
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its exposure to falling prices. In periods of falling interest
rates and rising bond prices, the Portfolio might sell a security
and purchase the same or a similar security on a when-issued or
forward commitment basis, thereby obtaining the benefit of
currently higher cash yields. However, if the Adviser were to
forecast incorrectly the direction of interest rate movements,
the Portfolio might be required to complete such when-issued or
forward transactions at prices inferior to then current market
values. No when-issued transactions forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets.
When-issued and forward commitments may be sold prior to
the settlement date, but the Portfolio enters into forward
commitments only with the intention of actually receiving or
delivering the securities, as the case may be. To facilitate
such transactions, the Custodian will maintain, in the separate
account, cash, U.S. Government Securities or other liquid, high-
grade debt obligations, having value equal to, or greater than,
any commitments to purchase securities on a when-issued or
forward commitment basis and, with respect to forward commitments
to sell the Portfolio's securities themselves. If the Adviser,
however, chooses to dispose of its right to acquire a when-issued
security prior to its acquisition or dispose of its right to
receive or deliver a security subject to a forward commitment
prior to the settlement date of the transaction, the Portfolio
can incur a gain or loss. At the time the Portfolio makes the
commitment to purchase or sell a security on a when-issued or
forward commitment basis, it records the transaction and reflects
the value of the security purchased or, if a sale, the proceeds
to be received, in determining its net asset value. In the event
the other party to a forward commitment transaction were to
default, the Portfolio might lose the opportunity to invest money
at favorable rates or to dispose of securities at favorable
prices.
FUTURE DEVELOPMENTS. The Portfolio may, following
written notice thereof to its shareholders, take advantage of
opportunities in the area of options and futures contracts and
options on futures contracts which are not presently contemplated
for use by the Portfolio or which are not currently available but
which may be developed, to the extent such opportunities are both
consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Such opportunities, if they
arise, may involve risks which exceed those involved in the
options and futures activities described above.
PORTFOLIO TURNOVER. Because the Portfolio will actively
use trading to benefit from yield disparities among different
issues of fixed-income securities or otherwise to achieve its
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investment objective and policies, the Portfolio may be subject
to a greater degree of portfolio turnover than might be expected
from investment companies which invest substantially all of their
funds on a long-term basis. The Portfolio cannot accurately
predict its portfolio turnover rate, but it is anticipated that
the annual turnover rate of the Portfolio generally will not
exceed 400%(excluding turnover of securities having a maturity of
one year or less). An annual turnover rate of 400% occurs, for
example, when all of the Portfolio's securities are replaced four
times in a period of one year. A 400% turnover rate is greater
than that of many other investment companies. A higher incidence
of short term capital gain taxable as ordinary income than might
be expected from investment companies which invest substantially
all their funds on a long term basis and correspondingly larger
mark up charges can be expected to be borne by the Portfolio.
For the fiscal years ended December 31, 1995 and December 31,
1996 the portfolio turnover rates were 68% and 137%,
respectively.
INVESTMENT RESTRICTIONS. The following investment
restrictions, which are applicable to the U.S. Government/High
Grade Securities Portfolio, supplement those set forth above and
in the Prospectus and may not be changed without Shareholder
Approval, as defined under the caption "General Information"
below.
The Portfolio may not:
1. Participate on a joint or joint and several basis
in any securities trading account;
2. Invest in companies for the purpose of exercising
control;
3. Issue senior securities, except in connection with
permitted borrowing for extraordinary emergency purposes;
4. Sell securities short or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable for, without payment of any further consideration,
securities of the same issue as, and equal in amount to, the
securities sold short ("short sales against the box"), and unless
not more than 10% of the Portfolio's net assets (taken at market
value) is held as collateral for such sales at any one time (it
is the Portfolio's present intention to make such sales only for
the purpose of deferring realization of gain or loss for federal
income tax purposes);
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5. Borrow money, except the Portfolio may borrow for
temporary purposes in an amount not exceeding 5% of the value of
the total assets of the Portfolio;
6. Invest in illiquid securities, including direct
placements or other securities which are subject to legal or
contractual restrictions on resale or for which there is no
readily available trading market, if more than 10% of the
Portfolio's assets (taken at market value) would be invested in
such securities;
7. Invest more than 5% of the value of its total
assets at the time an investment is made in the nonconvertible
preferred stock of issuers whose nonconvertible preferred stock
is not readily marketable;
8. Invest in the securities of any investment company,
except in connection with a merger, consolidation, acquisition of
assets or other reorganization approved by the Fund's
shareholders;
9. Invest more than 25% of the value of its total
assets at the time of investment in the aggregate of:
(a) nonconvertible preferred stock of issuers whose
senior debt securities are rated Aaa, Aa, or A by
Moody's or AAA, AA or A by S&P, provided that in no
event may such nonconvertible preferred stocks
exceed in the aggregate 20% of the value of the
Portfolio's total assets at the time of investment;
(b) debt securities of foreign issuers which are rated
Aaa, Aa or A by Moody's or AAA, AA or A by S&P;
and
(c) convertible debt securities which are rated Aaa, Aa
or A by Moody's, or AAA, AA or A by S&P, provided
that in no event may such securities exceed in the
aggregate 10% of the value of the Portfolio's total
assets at the time of investment;
10. Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein;
11. Purchase or sell commodities or commodity contracts
(except currencies, currency futures, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options) and other similar contracts; or
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12. Purchase securities on margin, except for such
short-term credits as may be necessary for the clearance of
transactions.
HIGH YIELD PORTFOLIO
GENERAL. As discussed in the Prospectus for the High
Yield Portfolio, the Portfolio will invest principally in fixed-
income securities rated Baa or lower by Moody's or BBB or lower
by S&P. The ratings of fixed-income securities by Moody's and
S&P are a generally accepted barometer of credit risk. They are,
however, subject to certain limitations from an investor's
standpoint. For a description of credit ratings see Appendix A to
the Prospectus.
Such limitations include the following: the rating of
an issuer is heavily weighted by past developments and does not
necessarily reflect probable future conditions; there is
frequently a lag between the time a rating is assigned and the
time it is updated; and there may be varying degrees of
difference in credit risk of securities in each rating category.
The Adviser will attempt to reduce the overall portfolio credit
risk through diversification and selection of portfolio
securities based on considerations mentioned below.
While ratings provide a generally useful guide to credit
risks, they do not, nor do they purport to, offer any criteria
for evaluating interest rate risk. Changes in the general level
of interest rates cause fluctuations in the prices of fixed-
income securities already outstanding and will therefore result
in fluctuation in net asset value of the Portfolio's shares. The
extent of the fluctuation is determined by a complex interaction
of a number of factors. The Adviser will evaluate those factors
it considers relevant and will make portfolio changes when it
deems it appropriate in seeking to reduce the risk of
depreciation in the value of the Portfolio.
PUBLIC UTILITIES. The High-Yield Portfolio's
investments in public utilities, if any, may be subject to
certain risks. Such utilities may have difficulty meeting
environmental standards and obtaining satisfactory fuel supplies
at reasonable costs. During an inflationary period, public
utilities also face increasing fuel, construction and other costs
and may have difficulty realizing an adequate return on invested
capital. There is no assurance that regulatory authorities will
grant sufficient rate increases to cover expenses associated with
the foregoing difficulties as well as debt service requirements.
In addition, with respect to utilities engaged in nuclear power
generation, there is the possibility that Federal, State or
municipal governmental authorities may from time to time impose
additional regulations or take other governmental action which
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might cause delays in the licensing, construction, or operation
of nuclear power plants, or suspension of operation of such
plants which have been or are being financed by proceeds of the
fixed-income securities in the Portfolio.
MORTGAGE-RELATED SECURITIES. The mortgage-related
securities in which the High-Yield Portfolio may invest provide
funds for mortgage loans made to residential home buyers. These
include securities which represent interests on pools of mortgage
loans made by lenders such as savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled for sale to investors (such as the Portfolio)
by various governmental, government-related and private
organizations.
Government-related (i.e., not backed by the full faith
and credit of the United States Government) guarantors include
FNMA and FHLMC. For a description of FNMA and FHLMC and the
securities they issue see above, U.S. Government/High Grade
Securities Portfolio -- U.S. Government Securities, FHLMC
Securities and FNMA Securities."
Yields on mortgage-related securities are typically
quoted by investment dealers and vendors based on the maturity of
the underlying instruments and the associated average life
assumption. In periods of falling interest rates the rate of
prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities.
Conversely, in periods of rising interest rates the rate of
prepayment tends to decrease, thereby lengthening the actual
average life of the pool. Historically, actual average life has
been consistent with the 12-year assumption referred to above.
Actual prepayment experience may cause the yield to
differ from the issued average life yield. Reinvestment of
prepayments may occur at higher or lower interest rates than the
original investment, thus affecting the yield of the Portfolio.
The compounding effect from reinvestment of monthly payments
received by the Portfolio will increase the yield to shareholders
compared to bonds that pay interest semi-annually.
DIRECT INVESTMENT IN MORTGAGES. The High-Yield
Portfolio may invest directly in residential mortgages securing
residential real estate (i.e., the Portfolio becomes the
mortgagee). Such investments are not mortgage-related securities
as described above. They are normally available from lending
institutions which group together a number of mortgages for
resale (usually from 10 to 50 mortgages) and which act as serving
agent for the purchaser with respect to, among other things, the
receipt of principal and interest payments. (Such investments
are also referred to as "whole loans"). The vendor of such
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mortgages receives a fee from the Portfolio for acting a
servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the
mortgages. At present, such investments are considered to be
illiquid by the Adviser. The Portfolio will invest in such
mortgages only if the Adviser has determined through an
examination of the mortgage loans and their originators (which
may include an examination of such factors as percentage of
family income dedicated to loan service and relationship between
loan value and market value) that the purchase of the mortgages
should not present a significant risk of loss to the Portfolio.
The Portfolio has no present intention of making direct
investments in mortgages.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS. The
High-Yield Portfolio may purchase securities offered on a "when-
issued" basis and may purchase or sell securities on a "forward
commitment" basis. For a general description of when-issued
securities and forward commitments, see above, "U.S.
Government/High Grade Portfolio-Investment Practices-When-Issued
Securities and Forward Commitments." No when-issued or forward
commitments will be made by the Portfolio if, as a result, more
than 20% of the value of the Portfolio's total assets would be
committed to such transactions.
The High-Yield Portfolio may purchase securities on a
"when, as and if issued" basis as described above in "U.S.
Government/High Grade Portfolio-Investment Practices-When-Issued
Securities and Forward Commitments." The commitment for the
purchase of any such security will not be recognized in the
Portfolio until the Adviser determines that issuance of the
security is probable. At such time, the Portfolio will record
the transaction and, in determining its net asset value, will
reflect the value of the security daily. At such time, the
Portfolio will also establish a segregated account with its
custodian bank in which it will maintain U.S. Government
Securities, cash or cash equivalents or other high grade debt
portfolio securities equal in value to recognized commitments for
such securities. The value of the Portfolio's commitments to
purchase the securities of any one issuer, together with the
value of all securities of such issuer owned by the Portfolio,
may not exceed 5% of the value of the Portfolio's total assets at
the time the initial commitment to purchase such securities is
made. Subject to the foregoing restrictions, the Portfolio may
purchase securities on such basis without limit. An increase in
the percentage of the Portfolio's assets committed to the
purchase of securities on a "when, as and if issued" basis may
increase the volatility of its net asset value. The Adviser and
the Directors of the Fund do not believe that the net asset value
of the Portfolio will be adversely affected by its purchase of
securities on such basis.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES. The High-
Yield Portfolio may invest in financial futures contracts
("futures contracts") and related options thereon. The Portfolio
may sell a futures contract or a call option thereon or purchase
a put option on such futures contract if the Adviser anticipates
that interest rates will rise, as a hedge against a decrease in
the value of the Portfolio's securities. If the Adviser
anticipates that interest rates will decline, the Portfolio may
purchase a futures contract or a call option thereon to protect
against an increase in the price of the securities the Portfolio
intends to purchase. These futures contracts and related options
thereon will be used only as a hedge against anticipated interest
rate changes. For a general discussion of futures contracts and
options thereon, including their risks, see "U.S. Government/High
Grade Securities Portfolio-Investment Practices-Futures Contracts
and Options on Futures Contracts" above and Appendix C.
Currently, futures contracts can be purchased on debt
securities such as U.S. Treasury bills and bonds, U.S. Treasury
notes with maturities between 6 l/2 years and 10 years, GNMA
certificates and bank certificates of deposit. The Portfolio may
invest in futures contracts covering these types of financial
instruments as well as in new types of such contracts that may
become available.
Financial futures contracts are traded in an auction
environment on the floors of several exchanges principally the
Chicago Board of Trade, the Chicago Mercantile Exchange and the
New York Futures Exchange. Each exchange guarantees performance
under contract provisions through a clearing corporation, a
nonprofit organization managed by the exchange membership which
is also responsible for handling daily accounting of deposits or
withdrawals of margin.
The Portfolio may not enter into futures contracts or
related options thereon if immediately thereafter the amount
committed to margin plus the amount paid for option premiums
exceeds 5% of the value of the Portfolio's total assets. In
instances involving the purchase of futures contracts by the
Portfolio, an amount equal to the market value of the futures
contract will be deposited in a segregated account of cash and
cash equivalents to collateralize the position and thereby insure
that the use of such futures contract is unleveraged.
PUT AND CALL OPTIONS. The High-Yield Portfolio may
purchase put and call options written by others and write put and
call options covering the types of securities in which the
Portfolio may invest. For a description of put and call options,
including their risks, see above, "U.S. Government/High Grade
Securities Portfolio-Investment Practices-Options on U.S. and
Foreign Government Securities." The Portfolio will not purchase
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any option if, immediately thereafter, the aggregate cost of all
outstanding options purchased by the Portfolio would exceed 2% of
the value of its total assets; the Portfolio will not write any
option (other than options on futures contracts) if, immediately
thereafter, the aggregate value of its portfolio securities
subject to outstanding options would exceed 15% of its total
assets.
FOREIGN SECURITIES. The portfolio may purchase foreign
securities provided the value of issues denominated in foreign
currency shall not exceed 20% of the Portfolio's total assets and
the value of issues denominated in United States currency shall
not exceed 25% of the Portfolio's total assets. For the risks
associated with investments in foreign debt securities, see
above, "U.S. Government/High Grade Securities Portfolio-High
Grade Debt Securities-Foreign Securities."
FOREIGN CURRENCY TRANSACTIONS. Since investments in
foreign companies will usually involve currencies of foreign
countries, and since the High-Yield Portfolio may temporarily
hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of the assets of the
Portfolio as measured in United States dollars may be affected
favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Portfolio may
incur costs in connection with conversions between various
currencies. The Portfolio will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or
through entering into forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at
a future date, which may be any fixed number of days (usually
less than one year) from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These
contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for
trades. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference
(the "spread") between the price at which they are buying and
selling various currencies.
The Portfolio may enter into forward foreign currency
exchange contracts only under two circumstances. First, when the
Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to
"lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed
amount of dollars, of the amount of foreign currency involved in
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the underlying security transactions, the Portfolio will be able
to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.
Second, when the Adviser believes that the currency of a
particular foreign country may suffer a substantial decline
against the U.S. dollar, the Portfolio may enter into a forward
contract to sell for a fixed amount of dollars the amount of
foreign currency approximating the value of some or all of the
Portfolio's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts
and the value of the securities involved will not generally be
possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in
the value of those securities between the date the forward
contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult,
and the successful execution of a short-term hedging strategy is
highly uncertain. The Adviser does not intend to enter into such
forward contracts under this second set of circumstances on a
regular or continuous basis, and will not do so if, as a result,
the Portfolio will have more than 5% of the value of its total
assets committed to the consummation of such contracts.
The Portfolio will also not enter into such forward
contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to
deliver an amount of foreign currency in excess of the value of
the securities in the Portfolio or other assets denominated in
that currency. At the consummation of such a forward contract,
the Portfolio may either make delivery of the foreign currency or
terminate its contractual obligation to deliver the foreign
currency by purchasing an offsetting contract obligating it to
purchase, at the same maturity date, the same amount of such
foreign currency. If the Portfolio chooses to make delivery of
the foreign currency, it may be required to obtain such currency
through the sale of portfolio securities denominated in such
currency or through conversion of other assets of the Portfolio
into such currency. If the Portfolio engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the
extent that there has been a change in forward contract prices.
Under normal circumstances, consideration of the
prospect for currency parities will be incorporated in a longer
term investment decision made with regard to overall
diversification strategies. However, the Adviser believes that
it is important to have a flexibility to enter into such forward
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contract when it determines that the best interest of the
Portfolio will be served.
The Fund's custodian bank will place liquid assets in a
separate account of the Portfolio in an amount equal to the value
of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts entered into under
the second set of circumstances, as set forth above. If the
value of the securities placed in the separate account declines,
additional cash or securities will be placed in the account on a
daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such
contracts.
The Portfolio's dealing in forward foreign currency
exchange contracts will be limited to the transactions described
above. Of course, the Portfolio is not required to enter into
such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the
Adviser. It also should be realized that this method of
protecting the value of the Portfolio's portfolio securities
against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which can be achieved at
some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such
currency increase.
RESTRICTED SECURITIES. The Portfolio may acquire
restricted securities within the limits set forth in the
Prospectus. For a description of such securities including their
risks, see above, "U.S. Government/High Grade Securities
Portfolio Restricted Securities" and "Other Investment Policies-
Illiquid Securities" below. If through the appreciation of
restricted securities or the depreciation of unrestricted
securities the Portfolio should be in a position where more than
10% of the value of its total assets is invested in illiquid
assets, including restricted securities, the Portfolio will take
appropriate steps to protect liquidity.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements terminable within seven days and pertaining
to issues of the United States Treasury with member banks of the
Federal Reserve System or primary dealers in United States
Government securities, so long as such investments do not in the
aggregate exceed the Investment Restrictions as set forth in the
Prospectus. Such investments would be made in accordance with
procedures established by the Portfolio to require that the
securities serving as collateral for each repurchase agreement be
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delivered either physically or in book entry form to the Fund's
custodian and to require that such collateral be marked to the
market with sufficient frequency to ensure that each such
agreement is fully collateralized at all times. The Portfolio
follows established procedures, which are periodically reviewed
by the Fund's Board of Directors, pursuant to which the Adviser
will monitor the creditworthiness of the dealers with which the
Portfolio enters into repurchase agreement transactions. For a
discussion of repurchase agreements, see "Other Investment
Policies -- Repurchase Agreement," below.
LENDING OF PORTFOLIO SECURITIES. Consistent with
applicable regulatory requirements, the Portfolio may loan its
portfolio securities where such loans are continuously secured by
cash collateral equal to no less than the market value,
determined daily, of the securities loaned. In loaning its
portfolio securities, the Portfolio will require that interest or
dividends on securities loaned be paid to the Portfolio. Where
voting or consent rights with respect to loaned securities pass
to the borrower, the Portfolio will follow the policy of calling
the loan, in whole or in part as may be appropriate, to permit it
to exercise such voting or consent rights if the exercise of such
rights involves issues having a material effect on the
Portfolio's investment in the securities loaned. Although the
Portfolio cannot at the present time determine the types of
borrowers to whom it may lend its portfolio securities, the
Portfolio anticipates that such loans will be made primarily to
bond dealers.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the High-Yield Portfolio, supplement
those set forth above and in the Prospectus and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Invest more than 5% of the value of its total assets
at the time an investment is made in the non-convertible
preferred stock of issuers whose non-convertible preferred stock
is not readily marketable;
2. Act as securities underwriter or invest in
commodities or commodity contracts, except that the Portfolio (i)
may acquire restricted or not readily marketable securities under
circumstances where, if such securities are sold, the Portfolio
might be deemed to be an underwriter for purposes of the
Securities Act, and (ii) may purchase financial futures as
described in the Prospectus and above;
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3. Engage in the purchase or sale of real estate,
except that the Portfolio may invest in securities secured by
real estate or interests therein or issued by companies,
including real estate investment trusts, which deal in real
estate or interests therein;
4. Invest in companies for the purpose of exercising
control of management;
5. Issue any senior securities as defined in the 1940
Act (except to the extent that when-issued securities
transactions, forward commitments or stand-by commitments may be
considered senior securities);
6. Participate on a joint, or on a joint and several,
basis in any trading account in securities;
7. Effect a short sale of any security;
8. Purchase securities on margin, but it may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities; or
9. Invest in the securities of any other investment
company except in connection with a merger, consolidation,
acquisition of assets or other reorganization.
TOTAL RETURN PORTFOLIO
The investment objective of the Total Return Portfolio
is to achieve a high return through a combination of current
income and capital appreciation. The Portfolio has adopted, as a
fundamental policy, that it be a "balanced fund;" this
fundamental policy cannot be changed without Shareholder
Approval. The percentage of the Portfolio's assets invested in
each type of security at any time shall be in accordance with the
judgment of the Adviser. The Portfolio's assets are invested in
U.S. Government and agency obligations, bonds whether convertible
or non-convertible and preferred and common stocks in such
proportions and of such type as are deemed best adapted to the
current economic and market outlooks. Ordinarily, the annual
portfolio turnover rate will not exceed 100%. For the fiscal
years ended December 31, 1995 and December 31, 1996 the portfolio
turnover rates were 30% and 57%, respectively.
Subject to market conditions the Portfolio may also try
to realize income by writing covered call options listed on a
domestic securities exchange. In so doing, the Portfolio
foregoes the opportunity to profit from an increase in the market
price in the underlying security above the exercise price of the
option in return for the premium it received from the purchaser
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of the option. The Adviser believes that such premiums will
increase the Portfolio's distributions without subjecting it to
substantial risks. No option will be written by the Portfolio
if, as a result, more than 25% of the Portfolio's assets are
subject to call options. For a discussion of covered call
options see "High Yield Portfolio -- Put and Call Options" above.
The Portfolio will purchase call options only to close out a
position in an option written by it. In order to close out a
position the Portfolio will make a "closing purchase transaction"
if such is available. Except as stated above, the Portfolio may
not purchase or sell puts or calls or combinations thereof.
The Portfolio engages primarily in holding securities
for investment and not for trading purposes. Purchases and sales
of portfolio securities are made at such times and in such
amounts as are deemed advisable in the light of market, economic
and other conditions, irrespective of the volume of portfolio
turnover. Ordinarily the annual portfolio turnover rate of
either the equity or the fixed-income securities will not exceed
100%, respectively.
Although the Portfolio may invest in foreign securities,
it has no present intention to do so.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Total Return Portfolio, supplement
those set forth above and in the Prospectus and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase the securities of any other investment
company except in a regular transaction in the open market;
2. Retain investments in the securities of any issuer
if directors or officers of the Fund or certain other interested
persons own more than 5% of such securities;
3. Invest in other companies for the purchase of
exercising control of management;
4. Purchase securities on margin, borrow money, or
sell securities short, except that the Portfolio may borrow in an
amount up to 10% of its total assets to meet redemption requests
and for the clearance of purchases and sales of portfolio
securities (this borrowing provision is not for investment
leverage but solely to enable the Portfolio to meet redemption
requests where the liquidation of portfolio securities is deemed
to be disadvantageous or inconvenient and to obtain such short-
term credits as may be necessary for the clearance of purchases
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and sales of portfolio securities; all borrowings at any time
outstanding will be repaid before any additional investments are
made; the Portfolio will not mortgage, pledge or hypothecate any
assets in connection with any such borrowing in excess of 15% of
the Portfolio's total assets);
5. Underwrite securities issued by other persons;
6. Purchase any securities as to which it would be
deemed a statutory underwriter under the Securities Act of 1933;
7. Purchase or sell commodities or commodity
contracts; or
8. Issue any securities senior to the capital stock
offered hereby.
INTERNATIONAL PORTFOLIO
GENERAL. The objective of the International Portfolio
is to seek to obtain a total return on its assets from long-term
growth of capital principally through a broad portfolio of
marketable securities of established non-United States companies
(e.g. incorporated outside the United States), companies
participating in foreign economies with prospects for growth and
foreign government securities. As a secondary objective, the
Portfolio will attempt to increase its current income without
assuming undue risk. There is no limitation on the percent or
amount of the Portfolio's assets which may be invested for growth
or income, and therefore, at any point in time, the investment
emphasis may be placed solely or primarily on growth of capital
or solely or primarily on income. There can be no assurance, of
course, that the Portfolio will achieve its objective.
Ordinarily, the annual portfolio turnover rate will not exceed
100%. For the fiscal years ended December 31, 1995 and
December 31, 1996 the portfolio turnover rates were 87% and 60%,
respectively.
In determining whether the Portfolio will be invested
for capital appreciation or for income or any combination of
both, the Adviser regularly analyzes a broad range of
international equity and fixed-income markets in order to assess
the degree of risk and level of return that can be expected from
each market. Based upon the current assessment of the Adviser,
the Portfolio expects that its objective will, over the long
term, be met principally through investing in the equity
securities of established non-United States companies which, in
the opinion of the Adviser, have potential for growth of capital.
However, the Portfolio can be expected during certain periods to
place substantial emphasis on income through investment in
foreign debt securities when it appears that the total return
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from such securities will equal or exceed the return on equity
securities.
Investments may be made from time to time in companies
in, or governments of, developing countries as well as developed
countries. Although there is no universally accepted definition,
a developing country is generally considered to be a country
which is in the initial stages of its industrialization cycle
with a low per capita gross national product. Historical
experience indicates that the markets of developing countries
have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often
have provided higher rates of return to investors. The Adviser
at present does not intend to invest more than 10% of the
Portfolio's total assets in companies in, or governments of,
developing countries.
The Adviser, in determining the composition of the
Portfolio, will initially seek the appropriate distribution of
investments among various countries and geographic regions.
Accordingly, the Adviser will consider the following factors in
making investment decisions on this basis: prospects for
relative economic growth between foreign countries; expected
levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range
of individual investment opportunities available to the
international portfolio investor. On December 31, 1996, 31.5% of
the Portfolio's net assets were invested in Japanese issuers.
For a description of Japan, see Appendix E.
The Adviser will, in analyzing individual companies for
investment, look for one or more of the following
characteristics: an above average earnings growth per share;
high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial
strength;strong competitive advantages; effective research and
product development and marketing; efficient service; pricing
flexibility; strength of management; and general operating
characteristics which will enable the companies to compete
successfully in their marketplace. While current dividend income
is not a prerequisite in the selection of portfolio companies,
the companies in which the Portfolio invests normally will have a
record of paying dividends for at least one year, and will
generally be expected to increase the amounts of such dividends
in future years as earnings increase.
Foreign securities such as those purchased by the
Portfolio may be subject to foreign government taxes which could
reduce the yield on such securities, although a shareholder
otherwise subject to U.S. federal income taxes will, subject to
certain limitations, be entitled to claim a credit or deduction
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for U.S. federal income tax purposes for his or her proportionate
share of such foreign taxes paid by the Portfolio.
It is expected that the Portfolio's investments will
ordinarily be traded on exchanges located in the respective
countries in which the various issuers of such securities are
principally based and in some case on other exchanges. As much
as 25% of the value of the Portfolio's total assets may be
invested in the securities of issuers having their principal
business activities in the same industry.
Under exceptional economic or market conditions abroad,
the Portfolio may temporarily invest for defensive purposes all
or a major portion of its assets in U.S. government obligations
or debt obligations of companies incorporated in and having their
principal activities in the United States. As discussed below,
the Portfolio may also from time to time invest its temporary
cash balances in United States short-term money market
instruments.
SECURITIES LENDING. The Portfolio may seek to increase
income by lending portfolio securities. The Portfolio will have
the right to call a loan to obtain the securities loaned at any
time on five days' notice or such shorter period as may be
necessary to vote the securities. During the existence of a loan
the Portfolio will receive the income earned on investment of the
collateral. The Portfolio will not, however, have the right to
vote any securities having voting rights during the existence of
the loan, but the Portfolio will call the loan in anticipation of
an important vote to be taken among holders of the securities or
the giving or withholding of their consent on a material matter
affecting the investment. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in
the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms
deemed by the Adviser to be in good standing, and when, in its
judgment, the amount which may be earned currently from
securities loans of this type justifies the attendant risk. The
value of the securities loaned will not exceed 30% of the value
of the Portfolio's total assets.
WARRANTS. The Portfolio may invest in warrants which
entitle the holder to buy equity securities at a specific price
for a specific period of time. Warrants may be considered more
speculative than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with
respect to the securities which may be purchased nor do they
represent any rights in the assets of the issuing company. Also,
the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to the expiration date.
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SPECIAL RISK CONSIDERATIONS. Investors should
understand and consider carefully the substantial risks involved
in securities of foreign companies and governments of foreign
nations, some of which are referred to below, and which are in
addition to the usual risks inherent in domestic investments.
There is generally less publicly available information
about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign
companies are also generally not subject to uniform accounting
and auditing and financial reporting standards, practices and
requirements comparable to those applicable to United States
companies.
It is contemplated that foreign securities will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Foreign securities markets
are generally not as developed or efficient as those in the
United States. While growing in volume, they usually have
substantially less volume than the New York Stock Exchange, and
securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies.
Similarly, volume and liquidity in most foreign bond markets is
less than in the United States and, at times, volatility of price
can be greater than in the United States. Fixed commissions on
foreign stock exchanges are generally higher than negotiated
commissions on United States exchanges, although the Portfolio
will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States.
With respect to certain foreign countries, there is the
possibility of adverse changes in investment or exchange control
regulations and interest rates, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of
the Portfolio, political or social instability, or diplomatic
developments which could affect United States investments in
those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States' economy
in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
The dividends and interest payable on certain of the
Portfolio's foreign securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Portfolio's shareholders. A
shareholder otherwise subject to United States federal income
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taxes will, subject to certain limitations, be entitled to claim
a credit or deduction for U.S. federal income tax purposes for
his or her proportionate share of such foreign taxes paid by the
Portfolio.
Although the Portfolio values its assets daily in terms
of U.S. dollars, its does not intend to convert its holdings of
foreign currencies into U.S. dollars on a daily basis. It will
do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers
do not charge a fee, they do realize a profit based on the
difference (commonly known as the "spread") between the price at
which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Portfolio at
one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
Investors should understand that the expense ratio of
the Portfolio can be expected to be higher than investment
companies investing in domestic securities since, among other
things, the cost of maintaining the custody of foreign securities
is higher and the purchase and sale of portfolio securities may
be subject to higher transaction charges, such as stamp duties
and turnover taxes.
Investors should further understand that all investments
have a risk factor. There can be no guarantee against loss
resulting from an investment in the Portfolio, and there can be
no assurance that the Portfolio's investment objective will be
attained. The Portfolio is designed for investors who wish to
diversify beyond the United States in an actively researched and
managed portfolio. The Portfolio may not be suitable for all
investors and is intended for long-term investors who can accept
the risks entailed in seeking long-term growth of capital through
investment in foreign securities as described above.
FOREIGN CURRENCY TRANSACTIONS. Since investments in
foreign companies will usually involve currencies of foreign
countries, and since the Portfolio may temporarily hold funds in
bank deposits in foreign currencies during the completion of
investment programs, the value of the assets of the Portfolio as
measured in United States dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Portfolio may incur costs
in connection with conversions between various currencies. The
Portfolio will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through entering into
forward contracts to purchase or sell foreign currencies. For a
discussion of forward foreign currency exchange contracts which
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also apply to the International Portfolio, see "High Yield
Portfolio -- Foreign Currency Transactions," above.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the International Portfolio, supplement
those set forth above and in the Prospectus, and may not be
changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Purchase a security if, as a result, the Portfolio
would own any securities of an open-end investment company or
more than 3% of the total outstanding voting stock of any closed-
end investment company, or more than 5% of the value of the
Portfolio's total assets would be invested in securities of any
closed-end investment company or more than 10% of such value in
closed-end investment companies in general, unless the security
is acquired pursuant to a plan of reorganization or an offer of
exchange;
2. Purchase or sell real estate (although it may
purchase securities secured by real estate or interest therein,
or issued by companies or investment trusts which invest in real
estate or interest therein);
3. Purchase or sell commodity contracts, provided,
however, that this policy does not prevent the Portfolio from
entering into forward foreign currency exchange contracts;
4. Purchase securities on margin, except for use of
the short-term credit necessary for clearance of purchases of
portfolio securities;
5. Effect short sales of securities;
6. Act as an underwriter of securities, except insofar
as it might be deemed to be such for purposes of the Securities
Act with respect to the disposition of certain portfolio
securities acquired within the limitations of restriction 4
above;
7. Purchase or retain the securities of any issuer if,
to the knowledge of the Adviser, the officers and directors of
the Fund and of the Adviser, who each owns beneficially more than
1/2 of 1% of the outstanding securities of such issuer, and
together own beneficially more than 5% of the securities of such
issuer;
8. Invest in companies for the purpose of exercising
management or control; or
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9. Issue senior securities except as permitted by the
1940 Act.
SHORT-TERM MULTI-MARKET PORTFOLIO AND GLOBAL BOND PORTFOLIO
GENERAL. The objective of the Short-Term Multi-Market
Portfolio is to seek the highest level of current income,
consistent with what the Adviser considers to be prudent
investment risk, that is available from a portfolio of high-
quality debt securities having remaining maturities of not more
than three years. The Portfolio seeks high current yields by
investing in debt securities denominated in the U.S. dollar and a
range of foreign currencies. Accordingly, the Portfolio will
seek investment opportunities in foreign, as well as domestic,
securities markets. While the Portfolio normally will maintain a
substantial portion of its assets in debt securities denominated
in foreign currencies, the Portfolio will invest at least 25% of
its net assets in U.S. dollar-denominated securities. The
Portfolio is designed for the investor who seeks a higher yield
than a money market fund or certificate of deposit and less
fluctuation in net asset value than a longer-term bond fund.
Certificates of deposit are insured and generally have fixed
interest rates while yields for the Portfolio will fluctuate with
changes in interest rates and other market conditions.
The investment objective of the Global Bond Portfolio is
to seek a high level of return from a combination of current
income and capital appreciation by investing in a globally
diversified portfolio of high quality debt securities denominated
in the U.S. dollar and a range of foreign currencies.
INVESTMENT POLICIES. The following investment policies,
which are applicable to the Short-Term Multi-Market Portfolio and
the Global Bond Portfolio, supplement, and should be read in
conjunction with, the information set forth in the Prospectus
under "Other Investment Policies and Techniques." The investment
policies are not designated "fundamental policies" within the
meaning of the 1940 Act and may be changed by the Fund's Board of
Directors without Shareholder Approval as defined under the
caption "General Information", below. However, a Portfolio will
not change its investment policies without contemporaneous
written notice to shareholders.
U.S. GOVERNMENT SECURITIES. See Appendix B hereto for a
description of obligations issued or guaranteed by U.S.
Government agencies or instrumentalities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
Each Portfolio may enter into futures contracts and options on
futures contracts. The successful use of such instruments draws
upon the Adviser's special skills and experience with respect to
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such instruments and usually depends on the Adviser's ability to
forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or
may realize losses and thus will be in a worse position than if
such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities
and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses. The Fund's Custodian will
place cash not available for investment in U.S. Government
Securities or other liquid high-quality debt securities in a
separate account of the Fund having a value equal to the
aggregate amount of, the Short-Term Multi-Market Portfolio's and
the Global Bond Portfolio's commitments in futures and options on
futures contracts.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, the Board of Directors has also adopted two
percentage restrictions on the use of futures contracts. The
first restriction is that a Portfolio will not enter into any
futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures
contracts of the Portfolio and premiums paid on options on
futures contracts would exceed 5% of the market value of the
total assets of the Portfolio. The second restriction is that
the aggregate market value of the outstanding futures contracts
purchased by a Portfolio not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions
will be changed by the Board of Directors without considering the
policies and concerns of the various applicable federal and state
regulatory agencies.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix C.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix C.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each
Portfolio may purchase or sell forward foreign currency exchange
contracts. While these contracts are not presently regulated by
the CFTC, the CFTC may in the future assert authority to regulate
forward contracts. In such event a Portfolio's ability to
utilize forward contracts in the manner set forth in the
Prospectus may be restricted. Forward contracts will reduce the
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potential gain from a positive change in the relationship between
the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance for a
Portfolio than if it had not entered into such contracts. The
use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. Dollar equivalent value of
the prices of or rates of return on a Portfolio's foreign
currency-denominated portfolio securities and the use of such
techniques will subject the Portfolio to certain risks.
The matching of the increase in value of a forward
contract and the decline in the U.S Dollar equivalent value of
the foreign currency-denominated asset that is the subject of the
hedge generally will not be precise. In addition, a Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contracts to hedge or cross-hedge
its assets. Also, with regard to a Portfolio's use of cross-
hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to
the U.S. Dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges
and the movements in the exchange rates of the foreign currencies
in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
PORTFOLIO TURNOVER. Since the Short-Term Multi-Market
Portfolio and the Global Bond Portfolio may engage in active
trading, their rates of portfolio turnover may be higher than
that of many other investment companies. The Portfolios cannot
accurately predict their portfolio turnover rates, but it is
anticipated that the annual turnover rate generally will not
exceed 500% for the Short-Term Multi Market Portfolio and 400%
for the Global Bond Portfolio (excluding turnover of securities
having a maturity of one year of less). An annual turnover rate
of 400% or 500% occurs, for example, when all of the Portfolio's
securities are replaced four or five times, respectively, in a
period of one year. A 400% and 500% turnover rate are greater
than that of many other investment companies. A higher incidence
of short term capital gain taxable as ordinary income than might
be expected from investment companies which invest substantially
all their funds on a long term basis and correspondingly larger
mark up charges can be expected to be borne by the Portfolios.
The annual portfolio turnover rates of securities of the
Short-Term Multi-Market Portfolio for the fiscal years ended
December 31, 1995 and December 31, 1996 were 379% and 159%,
respectively. The annual portfolio turnover rates of securities
of the Global Bond Portfolio for the fiscal years ended
December 31, 1995 and December 31, 1996 were 262% and 191%,
respectively.
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INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Short-Term Multi-Market Portfolio and
the Global Bond Portfolio, supplement those set forth above and
in the Prospectus, and may not be changed without Shareholder
Approval, as defined under the caption "General Information,"
below.
A Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Participate on a joint or joint and several basis
in any securities trading account;
3. Invest in companies for the purpose of exercising
control;
4. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes);
5. Purchase a security if, as a result (unless the
security is acquired pursuant to a plan of reorganization or an
offer of exchange), the Portfolio would own any securities of an
open-end investment company or more than 3% of the total
outstanding voting stock of any closed-end investment company or
more than 5% of the value of the Portfolio's total assets would
be invested in securities of any one or more closed-end
investment companies; or
6. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or purchase and sell securities of companies which deal in
real estate or interests therein; (ii) purchase or sell
commodities or commodity contracts (except currencies, futures
contracts on currencies and related options, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options, futures contracts and options on
futures contracts and other similar contracts); (iii) invest in
interests in oil, gas, or other mineral exploration or
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development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
In addition to the restrictions set forth above, in
connection with the qualification of its shares for sale in
certain states, a Portfolio may not invest in warrants if, such
warrants valued at the lower cost or market, would exceed 5% of
the value of the Portfolio's net assets.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
The objective of the North American Government Income
Portfolio is to seek the highest level of current income,
consistent with what the Adviser considers to be prudent
investment risk, that is available from a portfolio of debt
securities issued or guaranteed by the governments of the United
States, Canada, Mexico and Argentina, their political
subdivisions (including Canadian Provinces but excluding States
of the United States), agencies, instrumentalities or authorities
("Government Securities"). The Portfolio seeks high current
yields by investing in Government Securities denominated in the
U.S. Dollar, the Canadian Dollar and the Mexican Peso (including
the Mexican New Peso). Normally, the Portfolio expects to
maintain at least 25% of its assets in securities denominated in
the U.S. Dollar. The Portfolio will utilize certain other
investment techniques, including options and futures.
The Portfolio may invest its assets in Government
Securities considered investment grade or higher (i.e.,
securities rated at least BBB by S&P or at least Baa by Moody's)
or, if not so rated, of equivalent investment quality as
determined by the Portfolio's Adviser. Securities rated BBB by
S&P or Baa by Moody's are considered to have speculative
characteristics. Sustained periods of deteriorating economic
conditions or rising interest rates are more likely to lead to a
weakening in the issuer's capacity to pay interest and repay
principal than in the case of higher-rated securities. The
Portfolio expects that it will not retain a debt security which
is downgraded below BBB or Baa or, if unrated, determined by the
Portfolio's Adviser to have undergone similar credit quality
deterioration, subsequent to purchase by the Portfolio.
The Portfolio's Adviser will actively manage the
Portfolio's assets in relation to market conditions and general
economic conditions in the United States, Canada and Mexico and
elsewhere, and will adjust the Portfolio's investments in
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Government Securities based on its perception of which Government
Securities will best enable the Portfolio to achieve its
investment objective of seeking the highest level of current
income, consistent with what the Portfolio's Adviser considers to
be prudent investment risk. In this regard, subject to the
limitations described above, the percentage of assets invested in
a particular country or denominated in a particular currency will
vary in accordance with the assessment of the Portfolio's Adviser
of the relative yield and appreciation potential of such
securities and the relationship of the country's currency to the
U.S. Dollar. The Adviser anticipates that, under the conditions
appertaining at the date of this Prospectus, not more than
approximately 25% of the Portfolio's assets would be invested in
securities denominated in the Mexican Peso.
The Portfolio will invest at least, and normally
substantially more than, 65% of its total assets in Government
Securities. To the extent that its assets are not invested in
Government Securities, however, the Portfolio may invest the
balance of its total assets in debt securities issued by the
governments of countries located in Central and South America or
any of their political subdivisions, agencies, instrumentalities
or authorities, provided that such securities are denominated in
their local currencies and are rated investment grade or, if not
so rated, are of equivalent investment quality as determined by
the Portfolio's Adviser. The Portfolio will not invest more than
10% of its total assets in debt securities issued by the
governmental entities of any one such country, provided, however,
that the Portfolio may invest up to 25% of its total assets in
debt securities issued by governmental entities of Argentina
("Argentine Government Securities").
INVESTMENT POLICIES.
U.S. GOVERNMENT SECURITIES. For a general description
of obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, see Appendix A.
U.S. GOVERNMENT GUARANTEED MORTGAGE-RELATED SECURITIES-
- - GENERAL. For information regarding U.S. Government guaranteed
mortgage-related securities, see "U.S. Government/High Grade
Securities Portfolio -- U.S. Government Guaranteed Mortgage-
Related Securities -- General," above.
GNMA CERTIFICATES. For information regarding GNMA
Certificates, see "U.S. Government/High Grade Securities
Portfolio -- GNMA Certificates," above.
FHLMC SECURITIES. For information regarding FHLMC
Securities, see "U.S. Government/High Grade Securities Portfolio
- -- FHLMC Securities," above.
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FNMA SECURITIES. For information regarding FNMA
Securities, see "U.S. Government/High Grade Securities Portfolio
- -- FNMA Securities," above.
ZERO COUPON TREASURY SECURITIES. The Portfolio may
invest in "zero coupon" Treasury securities. Currently the only
U.S. Treasury security issued without coupons is the Treasury
bill. Although the U.S. Treasury does not itself issue Treasury
notes and bonds without coupons, under the U.S. Treasury STRIPS
program interest and principal payments on certain long term
treasury securities may be maintained separately in the Federal
Reserve book entry system and may be separately traded and owned.
In addition, in the last few years a number of banks and
brokerage firms have separated ("stripped") the principal
portions ("corpus") from the coupon portions of the U.S. Treasury
bonds and notes and sold them separately in the form of receipts
or certificates representing undivided interests in these
instruments (which instruments are generally held by a bank in a
custodial or trust account). The staff of the Commission has
indicated that in its view, these receipts or certificates should
be considered as securities issued by the bank or brokerage firm
involved and, therefore, should not be included in the
Portfolio's categorization of U.S. Government Securities. The
Portfolio disagrees with the staff's interpretation, but until
final resolution of the issue will include the Portfolio's
purchases of such securities in the non-U.S. Government security
portion of the Portfolio's investments. However, if such
securities are deemed to be U.S. Government Securities the
Portfolio will not be subject to any limitations on their
purchase.
Zero coupon Treasury securities do not entitle the
holder to any periodic payments of interest prior to maturity.
Accordingly, such securities usually trade at a deep discount
from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities which make
current distributions of interest. Current federal tax law
requires that a holder (such as the Portfolio) of a zero coupon
security accrue a portion of the discount at which the security
was purchased as income each year even though the Portfolio
receives no interest payment in cash on the security during the
year.
CANADIAN GOVERNMENT GUARANTEED MORTGAGE-RELATED
SECURITIES. Canadian mortgage-related securities may be issued
in several ways, the most common of which is a modified pass-
through vehicle issued pursuant to the program (the "NHA MBS
Program") established under the National Housing Act of Canada
("NHA"). Certificates issued pursuant to the NHA MBS Program
("NHA Mortgage-Related Securities") benefit from the guarantee of
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the Canada Mortgage and Housing Corporation ("CMHC"), a federal
Crown corporation that is (except for certain limited purposes)
an agent of the Government of Canada whose guarantee (similar to
that of GNMA in the United States) is an unconditional obligation
of the Government of Canada except as described below. The NHA
currently provides that the aggregate principal amount of all
issues of NHA Mortgage-Related Securities in respect of which
CMHC may give a guarantee must not exceed $60 billion.
NHA Mortgage-Related Securities are backed by a pool of
insured mortgages that satisfy the requirements established by
the NHA. Issuers that wish to issue NHA Mortgage-Related
Securities must meet the status and other requirements of CMHC
and submit the necessary documentation to become an "approved
issuer". When an approved issuer wishes to issue NHA Mortgage-
Related Securities in respect of a particular pool of mortgages,
it must seek the approval of CMHC. Such mortgages must, among
other things, be first mortgages that are insured under the NHA,
not be in default and provide for equal monthly payments
throughout their respective terms.
The mortgages in each NHA Mortgage-Related Securities
pool are assigned to CMHC which, in turn, issues a guarantee of
timely payment of principal and interest that is shown on the
face of the certificates representing the NHA Mortgage-Related
Securities (the "NHA MBS Certificates"). NHA Mortgage-Related
Securities do not constitute any liability of, nor evidence any
recourse against, the issuer of the NHA Mortgage-Related
Securities, but in the event of any failure, delay or default
under the terms of NHA MBS Certificates, the holder has recourse
to CMHC in respect of its guarantee set out on the NHA MBS
Certificates.
In any legal action or proceeding or otherwise, CMHC has
agreed not to contest or defend against a demand for the timely
payment of the amount set forth and provided for in, and unpaid
on, any duly and validly issued NHA MBS Certificate, provided
that such payment is sought and claimed by or on behalf of a bona
fide purchaser of and investor in such security, without actual
notice at the time of the purchase of the basis or grounds for
contesting or defending against that demand for timely payment.
While most Canadian Mortgage-Related Securities are
subject to voluntary prepayments, some pools are not and function
more like a traditional bond. The typical maturity of Canadian
Mortgage-Related Securities is five years as most Canadian
residential mortgages provide for a five-year maturity with equal
monthly blended payments of interest and principal based on a
twenty-five year amortization schedule. Pursuant to recent
changes adopted by CMHC, maturities of NHA Mortgaged-Related
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Securities may be as short as six months or as long as eighteen
years.
ILLIQUID SECURITIES. The Portfolio has adopted the
following investment policy which may be changed by the vote of
the Board of Directors.
The North American Government Income Portfolio will not
invest in illiquid securities if immediately after such
investment more than 15% of the Portfolio's net assets (taken at
market value) would be invested in such securities. For this
purpose, illiquid securities include, among others, (a)
securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restriction on
resale, (b) options purchased by the Portfolio over-the-counter
and the cover for options written by the Portfolio over-the-
counter and (c) repurchase agreements not terminable within seven
days.
See "Other Investment Policies -- Illiquid Securities," below,
for a more detailed discussion of the Portfolio's investment
policy on restricted securities and securities with legal or
contractual restrictions on resale.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may enter into futures contracts and options on futures
contracts. The successful use of such instruments draws upon the
Adviser's special skills and experience with respect to such
instruments and usually depends on the Adviser's ability to
forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated
benefits of futures contracts or options on futures contracts or
may realize losses and thus will be in a worse position than if
such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options on
futures and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Board of Directors has adopted the requirement that
futures contracts and options on futures contracts only be used
as a hedge and not for speculation. In addition to this
requirement, the Board of Directors has also restricted the
Portfolio's use of futures contracts so that the aggregate of the
market value of the outstanding futures contracts purchased by
the Portfolio not exceed 50% of the market value of the total
assets of the Portfolio. These restrictions will not be changed
by the Fund's Board of Directors without considering the policies
and concerns of the various applicable federal and state
regulatory agencies.
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For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix C.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix C.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The
Portfolio may purchase or sell forward foreign currency exchange
contracts. The Fund may enter into a forward contract, for
example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock
in" the U.S. Dollar price of the security ("transaction hedge").
Additionally, for example, when the Fund believes that a foreign
currency may suffer a substantial decline against the U.S.
Dollar, it may enter into a forward sale contract to sell an
amount of that foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such
foreign currency, or, when the Fund believes that the U.S. Dollar
may suffer a substantial decline against a foreign currency, it
may enter into a forward purchase contract to buy that foreign
currency for a fixed U.S. Dollar amount ("position hedge"). In
this situation the Fund may, in the alternative, enter into a
forward contract to sell a different foreign currency for a fixed
U.S. Dollar amount where the Fund believes that the U.S. Dollar
value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. Dollar value of
the currency in which portfolio securities of the Fund are
denominated ("cross-hedge"). The Fund's Custodian will place
cash not available for investment or liquid high-grade Government
Securities in a segregated account of the Fund having a value
equal to the aggregate amount of the Fund's commitments under
forward contracts entered into with respect to position hedges
and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or liquid high-grade
Government Securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of
the Fund's commitments with respect to such contracts. As an
alternative to maintaining all or part of the segregated account,
the Fund may purchase a call option permitting the Fund to
purchase the amount of foreign currency being hedged by a forward
sale contract at a price no higher than the forward contract
price or the Fund may purchase a put option permitting the Fund
to sell the amount of foreign currency subject to a forward
purchase contract at a price as high or higher than the forward
contract price.
While these contracts are not presently regulated by the
Commodity Futures Trading Commission ("CFTC"), the CFTC may in
the future assert authority to regulate forward contracts. In
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such event the Portfolio's ability to utilize forward contracts
in the manner set forth in the Prospectus may be restricted.
Forward contracts will reduce the potential gain from a positive
change in the relationship between the U.S. Dollar and foreign
currencies. Unanticipated changes in currency prices may result
in poorer overall performance for the Portfolio than if it had
not entered into such contracts. The use of foreign currency
forward contracts will not eliminate fluctuations in the
underlying U.S. Dollar equivalent value of the proceeds of or
rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject
the Portfolio to certain risks.
The matching of the increase in value of a forward
contract and the decline in the U.S. Dollar equivalent value of
the foreign currency denominated asset that is the subject of the
hedge generally will not be precise. In addition, the Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contracts to hedge its assets.
Also, with regard to the Portfolio's use of cross-hedges, there
can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S.
Dollar will continue. Thus, at any time poor correlation may
exist between movements in the exchange rates of the foreign
currencies underlying the Portfolio's cross-hedges and the
movements in the exchange rates of the foreign currencies in
which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
OPTIONS ON U.S. GOVERNMENT SECURITIES AND FOREIGN
GOVERNMENT SECURITIES. For additional information on the use,
risks and costs of options in U.S. Government Securities and
foreign government securities, see Appendix D.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to the types of securities in
which it invests. For additional information regarding
repurchase agreements, see "Other Investment Policies --
Repurchase Agreement," below.
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading to benefit from yield disparities among
different issues of securities, to seek short-term profits during
periods of fluctuating interest rates or for other reasons. Such
trading will increase the Portfolio's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income.
The portfolio turnover rates of securities of the Portfolio for
the fiscal years ended December 31, 1995 and December 31, 1996
were 35% and 4%, respectively. Management anticipates that the
annual turnover in the Portfolio will not be in excess of 400%.
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An annual turnover rate of 400% occurs, for example, when all of
the securities in the Portfolio's portfolio are replaced four
times in a period of one year. A high rate of portfolio turnover
involves correspondingly greater expenses than a lower rate,
which expenses must be borne by the Portfolio and its
shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. See
"Dividends, Distributions and Taxes" and "Portfolio
Transactions."
INVESTMENT RESTRICTIONS
The following restrictions, which are applicable to the
North American Government Income Portfolio, supplement those set
forth above and in the Prospectus, and may not be changed without
Shareholder Approval, as defined under the caption "General
Information," below.
The Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
2. Participate on a joint or joint and several basis
in any securities trading account;
3. Invest in companies for the purpose of exercising
control;
4. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes);
5. Purchase a security if, as a result (unless the
security is acquired pursuant to a plan of reorganization or an
offer of exchange), the Portfolio would own any securities of an
open-end investment company or more than 3% of the total
outstanding voting stock of any closed-end investment company or
more than 5% of the value of the Portfolio's total assets would
be invested in securities of any one or more closed-end
investment companies; or
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6. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or purchase and sell securities of companies which deal in
real estate or interests therein; (ii) purchase or sell
commodities or commodity contracts (except currencies, futures
contracts on currencies and related options, forward contracts or
contracts for the future acquisition or delivery of fixed-income
securities and related options, futures contracts and options on
futures contracts and other similar contracts); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
In addition to the restrictions set forth above, in
connection with the qualification of its shares for sale in
certain states, the Portfolio may not invest in warrants if, such
warrants valued at the lower of cost or market, would exceed 5%
of the value of the Portfolio's net assets. Included within such
amount, but not to exceed 2% of the Portfolio's net assets may be
warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange. Warrants acquired by the Portfolio
in units or attached to securities may be deemed to be without
value. The Portfolio will also not purchase puts, calls,
straddles, spreads and any combination thereof if by reason
thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets.
ADDITIONAL INFORMATION ABOUT CANADA,
THE UNITED MEXICAN STATES AND THE REPUBLIC OF ARGENTINA
The information in this section is based on material
obtained by the Fund from various Canadian, Mexican and Argentine
governmental and other economic sources believed to be accurate
but has not been independently verified by the Fund or the
Adviser. It is not intended to be a complete description of
Canada, Mexico or Argentina, their economies, or the consequences
of investing in Mexican Government Securities, Canadian
Government Securities or Argentine Government Securities.
ADDITIONAL INFORMATION ABOUT CANADA
Territory and Population
Canada is the second largest country in the world in
terms of land mass with an area of 9.22 million square kilometers
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(3.85 million square miles). It is located north of the
continental United States of America and east of Alaska. Canada
comprises ten provinces (Alberta, British Columbia, Manitoba, New
Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) and two territories (the
Northwest Territories and the Yukon Territory). Its population
is approximately 29 million.
Government
Canada is a constitutional monarchy with Queen Elizabeth
II of the United Kingdom its nominal head of state. The Queen is
represented by the Canadian governor-general, appointed on the
recommendation of the Canadian prime minister. Canada's
government has a federal structure, with a federal government and
ten provincial governments. The legislative branch consists of a
House of Commons (parliament) and the Senate. Members of the
House of Commons are elected by Canadian citizens over 18 years
of age. Senators are appointed on a regional basis by the Prime
Minister. The federal government is headed by the Prime Minister
who is chosen from the party that has won the majority of seats
in the House of Commons. The provincial governments each have a
Legislative Assembly and a Premier. The prime minister has the
privilege of appointing all judges except those of the provincial
courts.
Provinces have extensive power with specific areas of
jurisdiction. The federal government has defined areas of
jurisdiction and the power to act in areas declared by the House
of Commons to be for the general advantage of Canada. This
general power has been used to justify federal action in certain
areas of provincial jurisdiction. Concurrent federal and
provincial jurisdiction exists in certain matters, including
agriculture, immigration and pensions. The power-sharing issue
between the federal government and provincial governments has
been contentious and has proven to be a central issue in the
process of constitutional reform.
Politics
Since World War II, the federal government has been
formed by either the Liberal Party or the Progressive
Conservative Party. In October 1993, the Liberal Party, under
the leadership of Mr. Jean Chretien, won 178 of the 295 seats in
the Canadian House of Commons ending nine years of rule by the
Progressive Conservative Party. The next general election must
take place no later than October 1998. However, because of Mr.
Chretien's continuing popularity, it is likely that the Liberal
Party will call for an earlier election, possibly as early as
Spring 1997.
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Canada has had three major developments regarding unity
and constitutional reform in recent years. The first two major
developments were the rejection of the Meech Lake Agreement in
1990 and the Charlottetown Accord in 1992. Those reforms would
have given Quebec constitutional recognition as a distinct
society, transferred powers from the federal to the provincial
governments and reformed the Senate by providing for more equal
representation among the provinces.
The third major development was the possibility of
Quebec's independence. On September 12, 1994, the Quebec
separatist party, Parti Quebecois, under the leadership of
Jacques Parizeau, won 77 seats in the provincial election with
44.7% of the vote. The Liberal Party won 47 seats with 44.3% of
the vote. The Parti Quebecois' agenda included a call for a
referendum supporting independence. On October 30, 1995, the
referendum was defeated in a close ballot, in which 50.6% voted
against secession and 49.4% voted for secession. If the
referendum had been approved, Quebec would have become a separate
country, but would have retained formal political and economic
links with Canada similar to those that join members of the
European Union. Because of the closeness of the vote, it is
possible that there will be federally-sponsored legislation or
the proposal of constitutional amendments with regard to the
relationship between the federal government and the provinces, or
that there will be another referendum within the next few years.
In the meantime, the federal government has initiated a
legal action in the Supreme Court of Canada to determine the
legality of Quebec's secession. A full hearing on the matter is
not expected before Fall 1997. It is expected that Quebec's
position within Canada will continue to play an active part in
the political debate.
Monetary and Banking System
The central bank of Canada is the Bank of Canada. Its
main functions are conducting monetary policy, supervising
commercial banks, acting as a fiscal agent to the federal
government and managing the foreign exchange fund. The currency
unit of Canada is the Canadian dollar. Canada does not impose
foreign exchange controls on capital receipts or payments by
residents or non-residents.
Trade
Canada and the United States are each other's largest
trading partners and as a result there is a significant linkage
between the two economies. Bilateral trade between Canada and
the United States in 1995 was larger than between any other two
countries in the world. On January 2, 1988, Canada and the
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United States signed the Free Trade Agreement (the "FTA"), which
was ratified by the Canadian Parliament and the United States
Senate. In the summer of 1991, the United States, Canada and
Mexico began negotiating the North American Free Trade Agreement
("NAFTA"). NAFTA was signed on December 17, 1992 at separate
ceremonies in Washington D.C., Mexico City and Ottawa. On
December 30, 1993, after the Legislatures in the United States
and Mexico had ratified NAFTA, the Canadian government announced
that it had proclaimed NAFTA into law and had exchanged the
written notifications with the United States and Mexico needed to
bring NAFTA into force. As a result, NAFTA effectively replaced
the FTA. In November 1996, Canada and Chile entered into a trade
agreement that will become effective on June 2, 1997. Initial
talks with other South American countries are under way for
similar bilateral trade agreements that are expected eventually
to fall under the umbrella of a new form of NAFTA. When fully-
implemented, NAFTA is designed to create a North America Free
Trade Area, expand the flow of goods, services and investment,
and eventually eliminate tariff barriers, import quotas and
technical barriers among Canada, the United States, Mexico and
future parties to NAFTA.
Economic Information Regarding Canada
Canada experienced rapid economic expansion during most
of the 1980's. In the early 1990's, however, the economy
experienced a deep recession. This resulted from, among other
things, high government debt and high interest rates. The
recession partly created and partly highlighted some difficulties
which the present government is attempting to resolve. The
relatively low level of economic activity during this period
reduced the growth of tax receipts with the result that the
already high levels of government debt increased.
RECENT DEVELOPMENTS. The deterioration in the
government's fiscal position, which started during the recession
in the early 1990's, has since been aggravated by a reluctance to
decrease expenditures or increase taxes. In its 1995 budget, the
Liberal Party introduced new spending cuts, the largest in over
thirty years, to reduce Canada's budget deficit. For the fiscal
year 1994-95, the budget deficit was 4.2% of gross domestic
product ("GDP"). The 1996/97 budget estimates a deficit of
approximately 3% of GDP for 1996/97 and 2% of GDP for 1997/98.
While the Government's budget deficit objectives can be achieved,
it will require continued economic growth, lower interest rates
and additional reductions in government spending.
In addition to the growth of the federal government
deficit, provincial government debt has risen rapidly. Several
developments, including increased spending on social services at
the provincial level, were responsible for a significant amount
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of the growth of public debt from 1990-1992. In response to the
increase in provincial debt, a number of rating agencies
downgraded some provincial debt ratings. All provinces now have
plans to balance their respective budgets. This may prove to be
difficult considering the federal government's plan to reduce
certain transfers to the provinces. The provinces have recently
been emphasizing spending restraint and minimal tax increases.
Canada's real GDP growth rate slipped to 2.3% in 1995
from 4.1% in 1994. The economy barely grew in the first half of
1996, with GDP expanding by only 0.3% in each of the first two
quarters, but it picked up to .8% in the third quarter. Canada
is forecast to experience moderate growth until the end of 1997,
with real GDP growth of 1.6% forecast for 1996 and a pick-up to
3.0% expected in 1997. The trade sector continues to be the main
impetus for growth in the Canadian economy. The trade surplus
reached a record in 1995, more than three times higher than the
average surplus of between 1990 and 1994. As of the end of the
third quarter of 1996, the trade surplus was almost 35% higher
than it was for 1995. Exports grew by 16% in 1995 and by 6% as
of the end of the third quarter of 1996.
During 1994, despite growing output and low inflation,
concern over the country's deficit and the uncertainty associated
with Quebec's status within Canada led to a weakening of its
currency and higher interest rates. During the first two
quarters of 1995, however, in an attempt to increase domestic
growth, the Bank of Canada decreased interest rates. The easing
of monetary policy has also been facilitated by a renewed
strength in the Canadian dollar. This decrease in interest rates
since the beginning of 1995 has improved the government's
prospects of meeting its fiscal targets. On January 20, 1995,
the Canadian dollar fell to .702, its lowest rate in almost nine
years and close to its record low of .692. The Bank of Canada
responded by increasing rates on Treasury bills and selling U.S.
dollars. The Canadian dollar has increased in value from .702
against the U.S. Dollar on January 20, 1995 to .734 on February
21, 1997.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Canadian Dollar, information concerning
inflation rates, historical information regarding the Canadian
GDP and information concerning yields on certain Canadian
Government Securities. Historical figures are not necessarily
indicative of future fluctuations.
CURRENCY EXCHANGE RATES. The exchange rate between the
U.S. Dollar and the Canadian Dollar is at any moment related to
the supply of and demand for the two currencies, and changes in
the rate result over time from the interaction of many factors
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directly or indirectly affecting economic conditions in the
United States and Canada, including economic and political
developments in other countries and government policy and
intervention in the money markets.
The range of fluctuation in the U.S. Dollar/Canadian
Dollar exchange rate has been narrower than the range of
fluctuation between the U.S. Dollar and most other major
currencies. However, the range that occurred in the past is not
necessarily indicative of fluctuations in that rate that may
occur over time which may be wider or more confined than the
range that occurred over an historic period of comparable length.
Future rates of exchange cannot be predicted, particularly over
extended periods of time.
The following table sets forth, for each year indicated,
the annual average of the daily noon buying rates in New York for
cable transfers in U.S. Dollars for one Canadian Dollar as
certified by the Federal Reserve Bank of New York:
U.S. Dollars
1981 0.83
1982 0.81
1983 0.81
1984 0.77
1985 0.73
1986 0.72
1987 0.75
1988 0.81
1989 0.84
1990 0.86
1991 0.87
1992 0.83
1993 0.78
1994 0.73
1995 0.73
1996 0.73
Source: Federal Reserve Bulletin
INFLATION RATE OF THE CANADIAN CONSUMER PRICE INDEX.
Inflation, as measured by the national consumer price index, has
remained well below 2.5% since 1991. The following table sets
forth for each year indicated the average change in the Canadian
consumer price index for the twelve months ended December 31 for
the years 1981 through 1996 (1986 = 100).
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Annual Increases
In the
National Consumer
Price Index
1981 . . . . . . . . . . . . . . . 12.4%
1982 . . . . . . . . . . . . . . . 10.9
1983 . . . . . . . . . . . . . . . 5.7
1984 . . . . . . . . . . . . . . . 4.4
1985 . . . . . . . . . . . . . . . 3.9
1986 . . . . . . . . . . . . . . . 4.2
1987 . . . . . . . . . . . . . . . 4.4
1988 . . . . . . . . . . . . . . . 4.0
1989 . . . . . . . . . . . . . . . 5.0
1990 . . . . . . . . . . . . . . . 4.8
1991 . . . . . . . . . . . . . . . 5.6
1992 . . . . . . . . . . . . . . . 1.5
1993 . . . . . . . . . . . . . . . 1.8
1994 . . . . . . . . . . . . . . . 0.2
1995 . . . . . . . . . . . . . . . 2.1
1996 . . . . . . . . . . . . . . . 1.6
Source: BANK OF CANADA REVIEW Winter 1996-1997; CANADIAN
ECONOMIC OBSERVER, February 1997.
CANADIAN GROSS DOMESTIC PRODUCT. The following table
sets forth Canada's GDP for the years 1981 through the third
quarter of 1996 at historical and constant prices.
Gross Domestic Change from
Gross Domestic Product at 1986 Prior Year at
Product Prices Constant Prices
(millions of Canadian Dollars) (%)
1981 355,994 440,127 3.7%
1982 374,442 425,970 (3.2)
1983 405,717 439,448 3.2
1984 444,735 467,167 6.3
1985 477,988 489,437 4.8
1986 505,666 505,666 3.3
1987 551,597 526,730 4.2
1988 605,906 552,958 5.0
1989 650,748 566,486 2.4
1990 669,467 565,155 (0.2)
1991 676,477 555,052 (1.8)
1992 690,122 559,305 0.8
1993 712,855 571,722 2.2
1994 747,260 594,990 4.1
1995 776,299 608,835 2.3
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1996
1st Quarter 783,908 612,040 0.5
2nd Quarter 790,704 613,928 1.1
3rd Quarter 802,752 618,924 1.6
Source: BANK OF CANADA REVIEW Winter 1996-1997; CANADIAN
ECONOMIC OBSERVER, February 1997.
YIELDS ON CANADIAN GOVERNMENT TREASURY BILLS AND BONDS. The
following table sets forth the average monthly yield on 3-month
and 6-month government of Canada Treasury bills and 5-year and
10-year Canada Benchmark Bonds from January 1995 through December
1996.
Treasury Bills Benchmark Bonds
1995 3 Months 6 Months 5 Years 10 Years
January 8.10 8.47 9.18 9.34
February 8.11 8.15 8.46 8.76
March 8.29 8.35 8.23 8.57
April 7.87 7.87 7.93 8.31
May 7.40 7.36 7.41 7.88
June 6.73 6.65 7.33 7.81
July 6.65 6.87 7.79 8.27
August 6.34 6.62 7.58 8.00
September 6.58 6.80 7.54 7.89
October 7.16 7.21 7.54 7.86
November 5.83 5.87 6.74 7.19
December 5.54 5.64 6.64 7.11
Treasury Bills Benchmark Bonds
1996 3 Months 6 Months 5 Years 10 Years
January 5.12 5.20 6.33 7.01
February 5.21 5.38 6.87 7.53
March 5.02 5.25 7.02 7.64
April 4.78 4.97 7.09 7.76
May 4.68 4.88 7.01 7.72
June 4.70 4.94 7.05 7.77
July 4.39 4.75 6.96 7.62
August 4.02 4.32 6.60 7.34
September 3.86 4.13 6.28 7.16
October 3.17 3.33 5.59 6.47
November 2.73 2.89 5.10 6.05
December 2.85 3.24 5.44 6.37
Source: BANK OF CANADA REVIEW Winter 1996-1997.
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ADDITIONAL INFORMATION ABOUT THE UNITED MEXICAN STATES
Territory and Population
The United Mexican States ("Mexico") occupies a
territory of approximately 1.97 million square kilometers (759
thousand square miles). To the north, Mexico shares a border
with the United States of America, and to the south it has
borders with Guatemala and Belize. Its coastline is along both
the Gulf of Mexico and the Pacific Ocean. Mexico comprises 31
states and a Federal District (Mexico City). It is the second
most populous nation in Latin America, with an estimated
population of 91 million.
Mexico's three largest cities are Mexico City,
Guadalajara and Monterrey, with estimated populations in 1995 of
16.4 million, 3.3 million and 2.9 million, respectively. In the
1980s, Government efforts concerning family planning and birth
control, together with declining birth rates among women under 35
and those living in urban areas, have resulted in a reduction of
the population growth rate to a projected 1.7% in 1996.
Government
The present form of government was established by the
Constitution, which took effect on May 1, 1917. The Constitution
establishes Mexico as a Federal Republic and provides for the
separation of the executive, legislative and judicial branches.
The President and the members of Congress are elected by popular
vote of Mexican citizens over 18 years of age.
Executive authority is vested in the President, who is
elected for a single six-year term. The executive branch
consists of 17 ministries, the office of the Federal Attorney
General, the Federal District Department and the office of the
Attorney General of the Federal District.
Federal Legislative authority is vested in the Congress,
which is composed of the Senate and the Chamber of Deputies.
Senators serve a six-year term. Deputies serve a three-year
term, and neither Senators nor Deputies may serve consecutive
terms in the same Chamber. The Senate has 128 members, four from
each state and four from the Federal District. The Chamber of
Deputies has 500 members, of whom 300 are elected by direct vote
from the electoral districts and 200 are elected by a system of
proportional representation. The Constitution provides that the
President may veto bills and that Congress may override such
vetoes with a two-thirds majority of each Chamber.
Federal Judicial authority is vested in the Supreme
Court of Justice, the Circuit and District courts, and the
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Federal Judicial Board. The Supreme Court has 11 members who are
selected by the Senate from a pool of candidates nominated by the
President. Its members serve for 15 year terms, except for the
current members of the Court, whose appointments range from eight
to 20 years.
Mexico has diplomatic relations with more than 170
countries. It is a charter member of the United Nations and a
founding member of the Organization of American States, the
International Monetary Fund (the "IMF"), the World Bank, the
International Finance Corporation, the Inter-American Development
Bank and the European Bank for Reconstruction and Development.
Mexico became a member of the Organization for Economic
Corporation and Development (the "OECD") on April 14, 1994 and
the World Trade Organization ("WTO") on January 1, 1995 (the date
on which the WTO superseded the General Agreement on Trade and
Tariffs ("GATT")).
Politics
The Partido Revolucionario Institucional ("PRI") is the
dominant political party in Mexico. Since 1929 the PRI has won
all presidential elections and has held a majority in Congress.
Until 1989 it had also won all of the state governorships. The
oldest opposition party in Mexico is the Partido Accion Nacional
("PAN"). The third major party in Mexico is the Partido de la
Revolucion Democratica ("PRD").
On August 21, 1994, elections were held to select a new
President of Mexico for a six-year term beginning on December 1,
1994. In addition, elections were held for three-quarters of the
Senate and the entire Chamber of Deputies. The candidate of the
PRI, Ernesto Zedillo Ponce de Leon, won the Presidential election
with 48.77% of the votes, the candidate of the PAN was second
with 25.94% of the votes and the PRD candidate was third with
16.6% of the votes. With respect to the Congressional elections,
the PRI maintained its majority in both chambers, with 93 seats
in the Senate and 298 seats in the Chamber of Deputies. The PAN
had the second largest representation with 25 seats in the Senate
and 118 seats in the Chamber of Deputies and the PRD had the
third largest representation with 10 seats in the Senate and 70
seats in the Chamber of Deputies. The PRI won two additional
seats pursuant to proportional representation and the PAN and the
PRD each won one seat in extraordinary elections held on April
30, 1995. Next elections are due by July 1997 (Congressional)
and 2000 (Presidential).
At the beginning of 1994 armed insurgents attacked (and
in some cases temporarily seized control of) several villages in
the southern state of Chiapas. While the Government responded by
providing support to the local authorities and publicly offering
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to negotiate a peaceful resolution that would address the
underlying concerns of the local population, the conflict
remained a source of debate and uncertainty for the remainder of
the year. Negotiations with the insurgents continued through the
spring of 1994, but subsequently were broken off. In December of
1994, the Congress approved the creation of a Congressional peace
commission, to be formed by members of both chambers of Congress,
which would be responsible for mediating the negotiations between
the Government and the insurgents. By the end of 1994, however,
the insurgents had not agreed to resume negotiations and there
were additional incidents of civil unrest.
In the Spring of 1995, the Government renewed its
efforts to resolve its differences with the insurgents in the
Chiapas region by facilitating their participation in the
political process. On March 9, 1995, Congress approved a law
granting temporary amnesty to insurgents who participate in peace
talks with the Government, and on March 13, 1995, the law
establishing the framework for these peace talks took effect. On
September 11, 1995, the Government and the insurgents reached an
agreement pursuant to which both sides accepted a common
political agenda and procedural rules, and agreed to the creation
of a working committee regarding the rights of indigenous
peoples. This agreement was expected to represent a first step
toward a comprehensive peace agreement between the parties. The
working committee began negotiations on October 17, 1995 and
concluded a second round of meetings on November 19, 1995 having
made significant progress in laying out the framework for a
plenary session that took place from January 10 through January
19, 1996. The attendees at the plenary session drafted an
agreement on a series of measures aimed at enhancing and
guaranteeing the rights of the indigenous population. The
agreement was signed on February 16, 1996. Talks with the
insurgents have continued but are currently on hold.
On August 28, 1996, a newly formed group calling itself
the Popular Revolutionary Army attacked military and police
targets in small cities of some southern states of Mexico. It is
generally believed that this group does not enjoy popular
support, and its terrorists attacks have been condemned by both
Government and nongovernment representatives. The Government has
announced the apprehension of several alleged members of the
group.
In addition to the civil unrest in Chiapas, certain
national developments have led to disillusionment among the
electorate with the institutions of government. These events
include the assassination of Luis Donaldo Colosio, the likely
successor to former President Salinas and the murder of Mr. Jose
Francisco Ruiz Massieu, a high-ranking PRI official. There have
also been mushrooming revelations linking Mexico's drug cartels
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with high Government officials. These revelations could
jeopardize Mexico's status as an ally of the U.S. in the war
against narcotics smuggling. While Mexico is currently certified
as an ally there is no assurance that the certification will be
maintained. A loss of certification could result in the
termination of U.S. economic assistance to Mexico.
On January 17, 1995, the major political parties of
Mexico entered into a new accord to further the opening of the
political process in Mexico. On July 25, 1996, the Mexican
Government announced certain proposed constitutional amendments
aimed at reforming the electoral law that were ratified on August
22, 1996. The amendments, which had been agreed to by the
President and the leaders of the four major political parties
represented in Congress, among other things, exclude the
President from the Federal Electoral Institute, an autonomous
agency charged with organizing elections; eliminate the Electoral
Committee of the Chamber of Deputies, which had been responsible
for determining the validity of presidential elections; impose
limits on expenditures on political campaigns and controls on the
source of and uses of funds contributed to a political party;
grant voting rights to Mexican citizens residing abroad; reduce
from 315 to 300 the maximum number of congressional
representatives who may belong to a single party, and establish
an electoral procedure intended to result in a more proportional
representation in the Senate. The Mexican Supreme Court is
empowered to determine the constitutionality of electoral laws
and the Mexican Federal Electoral Court, which has been part of
the executive branch, will become part of the judicial branch.
Money and Banking
Banco de Mexico, chartered in 1925, is the central bank
of Mexico. It is the Federal Government's primary authority for
the execution of monetary policy and the regulation of currency
and credit. It is authorized by law to regulate interest rates
payable on time deposits, to establish minimum reserve
requirements for credit institutions and to provide discount
facilities for certain types of bank loans. The currency unit of
Mexico is the Peso. Mexico repealed its exchange control rules
in 1991 and now maintains only a market exchange rate.
A constitutional amendment relating to Banco de Mexico's
activities and role within the Mexican economy became effective
on August 23, 1993. The amendment's purpose was to reinforce the
independence of Banco de Mexico, which may in the future act as a
counterbalance to the executive and legislative branches in
monetary policy matters. The amendment significantly strengthens
Banco de Mexico's authority with respect to monetary policy,
foreign exchange and related activities and the regulation of the
financial services industry. On April 1, 1994, a new law
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governing the activities of Banco de Mexico became effective. The
new law was intended to put into effect the greater degree of
autonomy granted to Banco de Mexico under the constitutional
amendment described above and also established a Foreign Exchange
Commission charged with determining the nation's exchange rate
policies.
Trade Reform
Mexico has been a member of GATT since 1986 and a member
of the WTO since January 1, 1995. Mexico has also entered into
NAFTA with the United States and Canada. In addition, Mexico
signed a framework for a free trade agreement in 1992 with Costa
Rica, El Salvador, Guatemala, Honduras and Nicaragua and entered
into a definitive free trade agreement with Costa Rica in April
1994. A free trade agreement between Mexico and Chile went into
effect on January 1, 1992. A free trade agreement with Colombia
and Venezuela was signed in June 1994 and a similar agreement
with Bolivia was signed in September 1994; both agreements
entered into force in January 1995. In connection with the
implementation of NAFTA, amendments to several laws relating to
financial services (including the Banking Law and the Securities
Market Law) became effective on January 1, 1994. These measures
permit non-Mexican financial groups and financial intermediaries,
through Mexican subsidiaries, to engage in various activities in
the Mexican financial system, including banking and securities
activities.
Economic Information Regarding Mexico
During the period from World War II through the mid-
1970's, Mexico experienced sustained economic growth. During the
mid 1970's, Mexico experienced high inflation and, as a result,
the government embarked on a high-growth strategy based on oil
exports and external borrowing. The steep decline in oil prices
in 1981 and 1982, together with high international interest rates
and the credit markets' unwillingness to refinance maturing
external Mexican credits, led in 1982 to record inflation,
successive devaluations of the peso by almost 500% in total, a
pubic sector deficit of 16.9% of GDP and, in August 1982, a
liquidity crisis that precipitated subsequent restructurings of a
large portion of the country's external debt. Through much of
the 1980's, the Mexican economy continued to experience high
inflation and large foreign indebtedness. In February 1990,
Mexico became the first Latin American country to reach an
agreement with external creditor banks and multi-national
agencies under the U.S. Treasury's approach to debt reduction
known as the "Brady Plan."
The value of the Peso has been central to the
performance of the Mexican economy. From late 1982 until
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November 11, 1991, Mexico maintained a dual foreign exchange rate
system, with a "controlled" rate and a "free market" rate. The
controlled exchange rate applied to certain imports and exports
of goods, advances and payments of registered foreign debt and
funds used in connection with the in-bond industry (the industry
is comprised of companies which import raw materials without
paying a duty), and payments of royalties and technical
assistance under registered agreements requiring such payments.
The free market rate was used for all other types of
transactions. The dual system assisted in controlling the value
of the Mexican Peso, particularly from 1983 to 1985. In later
years the difference between the two rates was not significant.
Mexico has since repealed the controlled rate.
A fixed exchange rate was maintained from February to
December 1988. Thereafter, under a Government implemented
devaluation schedule, the intended annual rate of devaluation was
gradually lowered from 16.7% in 1989 to 11.4% in 1990, 4.5% in
1991 and 2.4% in 1992. From October 1992 through December 20,
1994, the peso/dollar exchange rate was allowed to fluctuate
within a band that widened daily. The ceiling of the band, which
was the maximum selling rate, depreciated at a daily rate of
0.0004 pesos (equal to approximately 4.5% per year), while the
floor of the band, i.e., the minimum buying rate, remained fixed.
Banco de Mexico agreed to intervene in the foreign exchange
market to the extent that the peso/dollar exchange rate reached
either the floor or the ceiling of the band.
RECENT DEVELOPMENTS. Beginning on January 1, 1994,
volatility in the peso/dollar exchange rate began to increase,
with the value of the peso relative to the dollar declining at
one point to an exchange rate of 3.375 pesos to the U.S. Dollar,
a decline of approximately 8.69% from the high of 3.1050 pesos
reached in early February. This increased volatility was
attributed to a number of political and economic factors,
including a growing current account deficit, the relative
overvaluation of the peso, investor reactions to the increase in
U.S. interest rates, lower than expected economic growth in
Mexico in 1993, uncertainty concerning the Mexican Presidential
elections in August 1994 and certain related developments.
On December 20, 1994, increased pressure on the
peso/dollar exchange rate led Mexico to increase the ceiling of
the Banco de Mexico intervention band. That action proved
insufficient to address the concerns of foreign investors, and
the demand for foreign currency continued. On December 22, the
Government adopted a free exchange rate policy, eliminating the
intervention band and allowing the peso to float freely against
the dollar. The value of the peso continued to weaken relative
to the dollar in the following days. There was substantial
volatility in the peso/dollar exchange during the first quarter
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of 1995, with the peso/dollar exchange rate falling to a low
point of 7.588 pesos to the U.S. Dollar on March 13, 1995. By
the end of April and through September 1995, the exchange rate
began to stabilize; however, the exchange rate began to show
signs of renewed volatility in October and November 1995. The
peso/dollar exchange rate fell to a low for the year of 8.14
pesos to the U.S. Dollar on November 13, 1995. The peso/dollar
exchange rate announced by Banco de Mexico on December 17, 1996
(to take effect on the second business day thereafter) for the
payment of obligations denominated in dollars and payable in
pesos was 7.8810 pesos to the U.S. Dollar.
In order to address the adverse economic situation that
developed at the end of 1994, the Government announced in January
1995 a new economic program and a new accord among the Government
and the business and labor sectors of the economy, which,
together with a subsequent program announced in March 1995 and
the international support package described below, formed the
basis of Mexico's 1995 economic plan (the "1995 Economic Plan").
The objectives of the 1995 Economic Plan were to stabilize the
financial markets, lay the foundation for a return to lower
inflation rates over the medium-term, preserve Mexico's
international competitiveness, maintain the solvency of the
banking system and attempt to reassure long-term investors of the
strong underlying fundamentals of the Mexican economy.
The central elements of the 1995 Economic Plan were
fiscal reform, aimed at increasing public revenues through price
and tax adjustments and reducing public sector expenditures;
restrictive monetary policy, characterized by limited credit
expansion; stabilization of the exchange rate while maintaining
the current floating exchange rate policy; reduction of the
current account deficit; introduction of certain financial
mechanisms to enhance the stability of the banking sector; and
maintenance and enhancement of certain social programs, to ease
the transition for the poorest segments of society.
In addition to the actions described above, in the
beginning of 1995, the Government engaged in a series of
discussions with the IMF, the World Bank, the Inter-American
Development Bank and the U.S. and Canadian Governments in order
to obtain the international financial support necessary to
relieve Mexico's liquidity crisis and aid in restoring financial
stability to Mexico's economy. The proceeds of the loans and
other financial support have been and will be used to refinance
public sector short-term debt, primarily Tesobonos, to restore
the country's international reserves and to support the banking
sector. The largest component of the international support
package is up to $20 billion in support from the United States
pursuant to four related agreements entered into on February 21,
1995. During 1995, the U.S. Government and the Canadian
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Government disbursed $13.7 billion of proceeds to Mexico under
these agreements and the North American Framework Agreement
("NAFA"), the proceeds of which were used by Mexico to refinance
maturing short-term debt, including Tesobonos and $1 billion of
short-term swaps under the NAFA.
Using resources made available through the international
support package as well as operations by Banco de Mexico, in 1995
Mexico altered its debt profile significantly. The outstanding
Tesobono balance was reduced from $29.2 billion at December 31,
1994 to $16.2 billion at the end of the first quarter of 1995,
$10.0 billion at the end of the second quarter, $2.5 billion at
the end of the third quarter and $246 million at the end of the
fourth quarter. By February 16, 1996, Mexico had no Tesobonos
outstanding, and has not issued Tesobonos since that date. As of
September 30, 1996, 100% of Mexico's net internal debt was
denominated and payable in pesos, as compared with only 44.3% of
such debt at the end of 1994.
On October 29, 1995, the Government announced the
establishment of a new accord among the Government and the
business, labor and agricultural sectors of the economy known as
the Alianza para la Recuperacion Economica (Alliance for Economic
Recovery or "ARE"). The chief objectives of the ARE, which was
replaced by the ACE (as defined below), were to stimulate
economic recovery and job creation, and to strengthen the basis
for gradual and sustainable economic growth. These general
objectives were intended to be accomplished through (i) the
establishment of tax incentives for business aimed at increasing
employment and investment in productive activities, (ii) a
gradual increase in the prices of public sector goods and
services, (iii) the promotion of consumer spending resulting from
increases in employment and private and public investment, (iv)
increased exports and (v) the reform of Mexico's pension system,
in order to encourage private domestic savings.
On October 26, 1996, the Government announced the
establishment of another accord among the Government and the
business, labor and agricultural sectors of the economy known as
the Alianza para el Crecimiento Economico (Alliance for Economic
Growth or "ACE"). The chief objectives of the ACE are to foster
sustainable economic growth by emphasizing (i) the export sector,
particularly through domestic and foreign investment, (ii) public
investment, particularly in the hydrocarbon, electricity,
transportation and water sectors, private consumption and (iii)
fiscal and monetary discipline in order to encourage an
environment of greater price stability and lower interest rates.
The effects of the devaluation of the peso, as well as
the Government's response to that and related events, were
apparent in the performance of the Mexican economy during 1995
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and 1996. Recent trade figures show a reversal of Mexico's trade
deficit during 1995. The value of imports (including in-bond
industries) decreased by 8.7% between 1994 and 1995, to $72.5
billion in 1995. At the end of the first ten months of 1996, the
value of imports (including in-bond industries) was at
approximately the same level as it was for 1995. During 1995,
Mexico registered a $7.089 billion trade surplus, its first
annual trade surplus since 1989. According to preliminary
information, Mexico registered a surplus in its trade balance of
$5,841 million during the first ten months of 1996 as compared
with a trade surplus of $6,128 million in the same period of
1995. During the first nine months of 1996, Mexico's current
account balance registered a deficit of $234 million, as compared
with a deficit of $1,018 million in the same period of 1995.
Banco de Mexico is currently disclosing reserve figures
on a weekly basis. On December 6, 1996, Mexico's international
reserves amounted to $16,398 million, as compared to $14,741
million at December 31, 1995, $6,148 million at December 31, 1994
and $24,538 million at December 31, 1993.
During 1995 real GDP decreased by 6.9%, as compared with
a growth rate of 3.5% during 1994. This downward trend continued
into the first quarter of 1996, when, according to preliminary
estimates, real GDP decreased by 1.0%, as compared with the same
period of 1995. During the second quarter of 1996, however, real
GDP grew by 7.2% as compared with the same period of 1995, the
first positive change after five consecutive negative quarters.
The real GDP continued to grow in the third quarter of 1996,
resulting in an overall increase of 4.4% for the first nine
months of 1996, as compared with the same period of 1995.
Although the Mexican economy has stabilized, there can be no
assurance that the government's plan will lead to a full
recovery.
Statistical and Related Information Concerning Mexico
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Mexican Peso, information concerning
inflation rates, historical information regarding the Mexican GDP
and information concerning interest rates on certain Mexican
Government Securities. Historical information is not necessarily
indicative of future fluctuations or exchange rates. In 1982,
Mexico imposed strict foreign exchange controls which shortly
thereafter were relaxed and were eliminated in 1991.
CURRENCY EXCHANGE RATES. There is no assurance that
future regulatory actions in Mexico will not affect the Fund's
ability to obtain U.S. Dollars in exchange for Mexican Pesos.
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The following table sets forth the exchange rates of the
Mexican Peso to the U.S. Dollar with respect to each year from
1981 to 1995 and for each of the eleven months ended November
1996.
Free Market Rate Controlled Rate
End of End of
Period Average Period Average
1981. . . . . . . 26 24 -- --
1982. . . . . . . 148 57 96 57
1983. . . . . . . 161 150 143 120
1984. . . . . . . 210 185 192 167
1985. . . . . . . 447 310 371 256
1986. . . . . . . 915 637 923 611
1987. . . . . . . 2.209 1.378 2.198 1.366
1988. . . . . . . 2.281 2.273 2.257 2.250
1989. . . . . . . 2.681 2.483 2.637 2.453
1990. . . . . . . 2.943 2.838 2.939 2.807
1991. . . . . . . 3.075 3.016 3.065* 3.007*
1992. . . . . . . 3.119 3.094 -- --
1993. . . . . . . 3.192 3.155 -- --
1994. . . . . . . 5.325 3.222 -- --
1995. . . . . . . 7.643 6.419 -- --
1996
January 7.391 7.504 -- --
February 7.539 7.504 -- --
March 7.548 7.574 -- --
April 7.404 7.471 -- --
May 7.401 7.434 -- --
June 7.611 7.542 -- --
July 7.611 7.623 -- --
August 7.493 7.514 -- --
September 7.537 7.544 -- --
October 7.917 7.685 -- --
November 7.870 7.919 -- --
* Through November 10, 1991.
Source: Banco de Mexico.
INFLATION AND CONSUMER PRICES. Through much of the
1980's, the Mexican economy continued to be affected by high
inflation, low growth and high levels of domestic and foreign
indebtedness. The annual inflation rate, as measured by the
consumer price index, rose from 28.7% in December 1981 to 159.2%
in December 1987. In December 1987, the Mexican Government
agreed with labor and business to curb the economy's inflationary
pressures by freezing wages and prices (the "1987 accord"). The
1987 accord included the implementation of restrictive fiscal and
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monetary policies, the elimination of trade barriers and the
reduction of import tariffs. After substantive increases in
public sector prices and utility rates, price controls were
introduced.
The 1987 accord was succeeded by a series of additional
accords, each of which continued to stress the moderation of
inflation, fiscal discipline and a gradual devaluation of the
peso. There was a gradual reduction in the number of goods and
services whose prices were covered by such accords. The two most
recent of these accords also incorporated a reduction in the
income tax rate applicable to corporations and certain self-
employed individuals from 35% to 34% and a reduction in the
withholding tax applicable to interest payments on publicly
issued external debt and external debt payable to certain
financial institutions from 15% to 4.9%. Under the later of
these two accords, tax benefits were proposed for workers
receiving salaries not exceeding twice the minimum wage and asset
taxes to be reduced to 1.8%. These policies lowered the consumer
inflation rate from 159.2% in 1987, to 19.7% in 1989, 29.9% in
1990, 18.8% in 1991, 11.9% in 1992, 8.0% in 1993, and 7.1% in
1994.
Over the medium-term, the Government is committed to
reversing the decline in real wages experienced in the last
decade through control of inflation, a controlled gradual upward
adjustment of wages and a reduction in income taxes for the lower
income brackets. Nonetheless, the effect of the devaluation of
the peso and the Government's response to that event and related
developments caused a significant increase in inflation in 1995,
as well a decline in real wages for much of the population during
1995. Inflation during 1995 (as measured by the increase in the
National Consumer Price Index), was 52.0%, as compared with 7.1%
during 1994. Inflation during the first eleven months of 1996
was 23.7%, as compared with 47.2% during the same period of 1995.
CONSUMER PRICE INDEX. The following table sets forth
the changes in the Mexican consumer price index for the year
ended December 31 for the years 1981 through 1995 and for the
eleven months ended November 30, 1996.
Increases in
National Consumer
Price Index
1981 .................................. 28.7%
1982................................... 98.9
1983................................... 80.8
1984................................... 59.2
1985................................... 63.7
1986...................................105.7
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1987...................................159.2
1988................................... 51.7
1989................................... 9.7
1990................................... 29.9
1991................................... 18.8
1992................................... 11.9
1993................................... 8.0
1994................................... 7.1
1995................................... 52.0
1996(1)................................ 23.7
(1) For the eleven months ended November 30.
Source: Banco de Mexico.
MEXICAN GROSS DOMESTIC PRODUCT. The following table
sets forth certain information concerning Mexico's GDP for the
years 1990 through 1996 at historical and constant prices.
Gross Change from
Gross Domestic Product Prior Year at
Domestic Product at 1980 Prices(1) Constant Prices
(millions of Mexican New Pesos) (percentage)
1991. . . . 865,166 5,463 3.6
1992. . . . 1,019,156 5,616 2.8
1993. . . . 1,145,382 5,659 0.7
1994. . 1,272,799 5,858 3.5
1995(2). 1,604,368 5,452 (6.9)
1996(2)(3) 2,285,266 1,270.4(4) 3.0
(1) Constant peso with purchasing power at December 31, 1980,
expressed in new pesos.
(2) Preliminary.
(3) Annualized.
(4) Constant peso with purchasing power at December 31, 1993.
Source: Ministry of Finance and Public Credit
INTEREST RATES. The following table sets forth the
average interest rates per annum on 28-day and 91-day Cetes, the
average weighted cost of term deposits for commercial banks
("CPP"), the average interest rate ("TIIP") and the equilibrium
interest rate ("TIIE") for the periods listed below:
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Average Cetes and Interest Rates
28-Day 91-Day
Cetes Cetes CPP TIIP TIIE
1990:
Jan.-June 41.2 40.7 43.2% _____ _____
July-Dec. 28.3 29.4 31.0 _____ _____
1991:
Jan.-June 21.2 21.7 24.3 _____ _____
July-Dec. 17.3 18.0 20.8 _____ _____
1992:
Jan.-June 13.8 13.8 16.9 _____ _____
July-Dec. 17.4 18.0 20.7 _____ _____
1993:
Jan.-June 16.4 17.3 20.9 20.4(1) _____
July-Dec. 13.5 13.6 16.2 16.1 _____
1994:
Jan.-June 13.0 13.5 14.2 15.3 _____
July-Dec. 15.2 15.7 16.8 20.4 _____
1995:
Jan.-June 55.0 54.3 49.6 63.6 71.2(2)
July-Dec. 41.9 42.2 40.7 44.5 4.5
1996:
January 41.0 41.6 40.2 42.7 42.7
February 38.6 40.7 35.9 40.1 40.1
March 41.4 43.0 39.1 43.6 43.6
April 35.2 37.1 35.2 36.9 36.6
May 28.5 31.1 29.4 30.1 30.3
June 27.8 29.6 27.1 30.1 30.1
July 31.3 31.7 29.2 33.5 33.5
August 26.5 29.2 27.5 29.5 29.4
September 23.9 27.8 24.9 26.6 26.8
October 25.8 27.7 25.0 29.7 28.7
November 29.6 28.9 28.0 31.9 30.7
(1) February-June average
(2) Average for the last two weeks of March Source: Banco de
Mexico
ADDITIONAL INFORMATION ABOUT THE REPUBLIC OF ARGENTINA
Territory and Population
The Republic of Argentina ("Argentina") is the second
largest country in Latin America, occupying a territory of 2.8
million square kilometers (1.1 million square miles) (3.8 million
square kilometers (1.5 million square miles) if territorial
claims in the Antarctic and certain South Atlantic islands are
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included). It is located at the extreme south of the South
American continent, bordered by Chile, Bolivia, Paraguay, Brazil,
Uruguay and the South Atlantic Ocean. Argentina consists of 23
provinces and the federal capital of Buenos Aires. In 1991, the
year of the last Census, it had a population of approximately
32.635 million.
The most densely inhabited areas and the traditional
agricultural wealth are on the wide temperate belt that stretches
across central Argentina. About one-third of the population lives
in the greater Buenos Aires area. Six other urban centers,
Cordoba, Rosario, Mendoza, San Miguel de Tucuman, Mar del Plata
and La Plata, have a population of over 500,000 each.
Approximately 79% of the country's population is urban. During
the period 1980-1990, Argentina's population grew at a 1.4%
average annual rate.
Government
The Argentine federal constitution (the "Constitution"),
was promulgated on August 24, 1994 and became effective
immediately. The Constitution retains the basic principles of
the Constitution first established in 1853. The Constitution
provides for a tripartite system of government: an executive
branch headed by a president; a legislative branch made up of a
bicameral congress; and a judicial branch, of which the Supreme
Court of Justice (the "Supreme Court") is the highest body of
authority. The President is directly elected by the voters and
may serve for a maximum of two consecutive four-year terms. The
next election for the Presidency is scheduled to take place in
1999. The President directs the general administration of the
country and has the power to veto laws in whole or in part,
although Congress may override a veto by a two-thirds vote.
The Congress is made up of the Senate and the Chamber of
Deputies. The 72-member Senate consists of three Senators for
each province and the federal capital of Buenos Aires. Senators
are elected for six-year terms, and serve in staggered terms so
that one-third of the Senate's seats are subject to elections
every two years. The Chamber of Deputies consists of 257 seats
which are allocated according to each province's population.
Representatives are elected for four-year staggered terms so that
one-half of the Chamber is subject to elections every two years.
The judicial system comprises federal and provincial
trial courts, courts of appeal and supreme courts. The supreme
judicial power of the Republic is vested in the Supreme Court,
which has nine members who are appointed for life by the
President (subject to ratification by the Senate). In addition,
in 1994 Argentina's two largest political parties entered into an
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agreement whereby future Supreme Court justices will be selected
from a list of nominees mutually agreed upon by both parties.
Each province has its own constitution, and elects its
own governor, legislators and judges, without the intervention of
the federal government.
Politics
The two largest political parties in Argentina are the
Partido Justicialista or Peronist Party ("PJ"), which evolved out
of Juan Peron's efforts to expand the role of labor in the
political process in the 1940s, and the Union Civica Radical or
Radical Civic Union ("UCR"), founded in 1890. Traditionally, the
UCR has had more urban middle-class support and the PJ more labor
support. At present, support for both parties is broadly based,
with the PJ having substantial support from the business
community. Smaller parties occupy varied political positions on
both sides of the political spectrum and some are active only in
certain provinces. As of December 10, 1995, the date new
Deputies took office, the PJ held 130 seats and the UCR held 70
seats in the Chamber of Deputies and 40 seats and 22 seats in the
Senate, respectively.
Since the 1930's, Argentina's political parties have had
difficulty in resolving the inter-group conflicts that arose out
of the Great Depression, the deepening social divisions that
occurred under the Peron Government and the economic stagnation
of the past several decades. As a result, the military
intervened in the political process on several occasions and
ruled the country for 22 of the past 65 years. Poor economic
management by the military and the loss of a brief war with the
United Kingdom over the Malvinas (Falkland) Islands led in 1983
to the end of the most recent military government, which had
ruled the country since 1976.
Four military uprisings have occurred since 1983, the
most recent in December 1990. The uprisings, which were led by a
small group of officers, failed due to a lack of support from the
public and the military as a whole.
Since 1983, Argentina has had two successive elected
civilian Presidents. Raul Alfonsin, elected in 1983, was the
first civilian president in six decades to stay in office until
the scheduled election of a successor. His UCR Government re-
established civilian rule, including a functioning Congress. The
current president, Carlos Menem, won the presidential election in
May 1989 and took office in July 1989, several months ahead of
the scheduled inauguration, in the midst of an economic crisis.
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President Menem, the leader of the PJ, was first elected
with the backing of organized labor and business interests that
traditionally supported a closed economy and a large public
sector. Shortly after taking office, however, President Menem
adopted market-oriented and reformist policies, including a large
privatization program, a reduction in the size of the public
sector and an opening of the economy to international
competition. President Menem won reelection in May 1995, but his
popularity has eroded recently as the government has faced
allegations of corruption and criticism from both the ruling and
opposition parties concerning its economic policies. The mid-
1997 Congressional elections are expected to test President
Menem's popularity.
Argentina has diplomatic relations with more than 135
countries. It is a charter member of the United Nations and is
currently a member of its security council, and is a founding
member of the Organization of American States. It is also a
member of the IMF and the World Bank. Argentina became a member
of the WTO on January 1, 1995 (the date on which the WTO
superseded GATT).
Monetary and Banking System
The central bank of Argentina is the Banco Central de la
Republica Argentina ("Central Bank of Argentina"). Its primary
functions include the administration of the financial sector,
note issue, credit control and regulation of foreign exchange
markets. The currency unit of Argentina is the Peso. Under the
Government's medium-term program with the IMF, the Government has
agreed to maintain the present fixed exchange rate of one peso
per dollar. Due to the ease of convertibility between the peso
and the dollar as a result of the Government's exchange rate
policies, changes in U.S. interest rates constitute a significant
factor in determining peso-dollar capital flows.
Economic Information Regarding Argentina
The Argentina economy has many strengths including a
well-balanced natural resource base and a high literacy rate.
Since World War II, however, it has had a record of erratic
growth, declining investment rates and rapid inflation. Since
the implementation of the current reform program in March 1991,
significant progress has been made in reducing inflation and
increasing real GDP growth. Although the GDP declined by 4.4% in
1995, by the second quarter of 1996, the GDP had increased by
4.8% from the second quarter of 1995 and preliminary data for the
third quarter of 1996 indicate a 6.6% increase from the third
quarter of 1995.
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DEREGULATION OF THE ECONOMY AND PRIVATIZATIONS.
Deregulation of the domestic economy, liberalization of trade and
reforms of investment regulations are prominent features of
Argentina's structural adjustment program. In order to achieve
the free functioning of markets, the Government has undertaken an
extensive program for the removal of economic restrictions and
regulations and the promotion of competition.
In 1989 and 1990, steps were taken to remove various
regulations that restricted both international trade and domestic
commerce. Restrictions were removed in order to allow the
private sector to provide certain public services, such as
telephone, electricity and natural gas, subject to governmental
regulation.
On October 31, 1991, the Argentine government
promulgated its principal deregulation legislation which
deregulated the domestic market for goods, services and
transportation, abolished restrictions on imports and exports,
abolished or simplified a number of regulatory agencies and
allowed free wage bargaining in the private sector. In the
financial sector, this legislation abolished all stamp taxes
relating to publicly offered securities, all capital gains taxes
on stocks and bonds held by non-resident investors and fixed
commissions on the stock exchanges.
In addition, Argentina has eliminated restrictions on
foreign direct investment and capital repatriation. In late
1993, legislation was adopted abolishing previous requirements of
a three-year waiting period for capital repatriation. Under the
new legislation, foreign investors will be permitted to remit
profits at any time and to organize their companies and make use
of domestic credit under the same rights and under the same
conditions as local firms. The process of deregulation and
liberalization is continuing through the privatization process,
the proposed reform of the social security system, regional
integration and further labor law reforms.
In 1989, the State Reform Law declared certain
enterprises eligible for privatization. In addition to increasing
the efficiency of services provided by public sector enterprises,
the privatizations have also served to reduce outstanding debt
(by applying cash proceeds and through the selective use of
debt-to-equity conversions), increase reserves and increase tax
revenues from the new owners of the enterprises. The
privatization program has also served as an important conduit for
direct foreign investment into Argentina attracting interested
investors from Asia, Europe, North America and Latin America. The
Government completed 32 major privatizations in 1993, 11
privatizations in 1994 and 3 privatization in 1995. On March 13,
1995 the Government announced a new fiscal package, which
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included, among other measures, an acceleration in the sale of
assets and the privatization of several additional companies.
The following provides certain statistical and related
information regarding historical rates of exchange between the
U.S. Dollar and the Argentine Peso, information concerning
inflation rates, historical information concerning the Argentine
GDP and information concerning interest rates on certain
Argentine Government Securities. Historical figures are not
necessarily indicative of future fluctuations.
CURRENCY EXCHANGE RATES. The Argentine foreign exchange
market was highly controlled until December 1989, when a free
exchange rate was established for all foreign transactions. Since
the institution of the Convertibility Law on April 1, 1991, the
Argentine currency has been tied to the U.S. Dollar. Under the
Convertibility Law, the Central Bank of Argentina must maintain a
reserve in foreign currencies, gold and certain public bonds
denominated in foreign currencies equal to the amount of
outstanding Argentine currency and is obliged to sell dollars to
any person who so requires at a rate of one peso to one dollar.
From April 1, 1991 through the end of 1991, the exchange rate was
approximately 10,000 Australes (the predecessor to the Argentine
Peso) per U.S. Dollar. On January 1, 1992 the Argentine Peso
equal to 10,000 Australes was introduced. Since January 1, 1992,
the rate of exchange from Argentine Peso to U.S. Dollar has been
approximately one to one. However, the historic range is not
necessarily indicative of fluctuations that may occur in the
exchange rate over time which may be wider or more confined than
recorded previously over a comparable period. Future rates of
exchange cannot be predicted, of course, particularly over
extended periods of time.
The following table sets forth, for each year indicated,
the nominal exchange rates of Argentine Peso to U.S. Dollar as of
the last day of the period indicated.
Free Rate
1990 . . . . . . . . . . . . .5590
1991 . . . . . . . . . . . . .9990
1992 . . . . . . . . . . . . .9990
1993 . . . . . . . . . . . . .9990
1994 . . . . . . . . . . . . 1.0
1995 . . . . . . . . . . . . 1.0
1996 . . . . . . . . . . . . 1.0
Source: Banco Central de la Republica Argentina
WAGES AND PRICES. Prior to the adoption of a new
economic plan announced by former Economy Minister Domingo F.
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Cavallo in March 1991, the Argentine economy was characterized by
low and erratic growth, declining investment rates and rapid
inflation. Argentina's high inflation rates and balance of
payments imbalances during the period from 1975 to 1990 resulted
mainly from a lack of control over fiscal policy and the money
supply. Large subsidies to state-owned enterprises and an
inefficient tax collection system led to large persistent public-
sector deficits which were financed in large part through
increases in the money supply and external financings. High
inflation combined with the lag between the accrual and receipt
of taxes reduced real tax revenues and increased the size of the
deficit, further fueling the inflationary cycle. Inflation
accelerated on several occasions and turned into hyperinflation
in 1989 and the end of 1990, with prices rising at an annual rate
of 1,000% or more.
During the 1980's and in 1990, the Argentine government
instituted several economic plans to stabilize the economy and
foster real growth, all of which failed after achieving initial
success mainly because the government was unable to sustain
reductions in the public deficit. The government's initial
stabilization efforts included a devaluation of the Austral, a
fixed exchange rate, wage and price controls and a sharp rise in
public utility rates.
The government's efforts proved inadequate, however, and
foreign exchange markets declined sharply in anticipation of a
new bout of hyperinflation. The government adopted a new set of
stabilization measures in December 1989 which abandoned attempts
to control wages, prices and the exchange rate and sought to
restrain the public deficit which was believed to be the
principal cause of Argentina's chronic inflation. The new
stabilization plan (called the Bonex Plan) featured, among other
things, tax reforms, a tighter rein on public enterprises and
restrictions on lending activities of the public sector banks
(which had been financing provincial government deficits through
loans which were in turn financed with discounts from the Central
Bank), government personnel cuts and a reliance on cash income
generated by privatizations to reduce the public sector deficit.
The plan also eliminated all restrictions on foreign exchange
transactions. In addition, the plan froze fixed-rate short-term
bank deposits pursuant to which holders of 7- to 30-day deposits
were permitted to withdraw no more than the equivalent of
approximately U.S. $1000 from their accounts, and the balance was
made payable only in 10-year U.S. Dollar denominated government
bonds (Bonex 89). The plan also provided for the compulsory
exchange of certain domestic currency denominated bonds for Bonex
89.
The stabilization effort succeeded in ending temporarily
the period of hyperinflation, but not in ending the Argentine
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economy's susceptibility to inflation. In late 1990, a
deterioration in the finances of the social security system and
provincial governments led to an expansion of Central Bank
credit. The Central Bank loaned funds to the social security
system to allow it to meet year-end payments and also funded
provincial banks suffering deposit runs. The provincial banks
continued to lend to finance provincial government deficits. The
credit expansion led to downward market pressure on the Austral,
and a resurgence of price inflation. Between December 1989 and
December 1990, the CPI rose 1,343.9%, which was significantly
less than the 4,923.6% increase in 1989, but was still an
unacceptably high inflation rate. The government responded by
installing a new economic team headed by Economy Minister
Cavallo, which acted to reduce the public sector deficit by
increasing public utility rates and taxes and by developing a new
stabilization program.
The Argentine government's current stabilization program
is built around the plan announced by Economy Minister Cavallo on
March 20, 1991 (the "Convertibility Plan", as amended and
supplemented), and approved by Congress through passage of the
Convertibility Law. The Convertibility Plan has sought to reduce
inflation and restore economic stability through reforms relating
to the tax system, privatizations and the opening of the economy
that are intended to address underlying structural problems that
had distorted fiscal and monetary policy.
The Convertibility Plan is centered on the two following
fundamental principles:
(1) Full international reserve backing for the monetary
base. The monetary base (consisting of currency in circulation
and Peso deposits of financial entities with the Central Bank) is
not to exceed the Central Bank's gross international assets as a
fixed rate of one Argentine Peso per U.S. Dollar. This
effectively means that the money supply can be increased only
when backed by increases in the level of international reserves,
and not whenever the public sector deficit or the financial
sector needs to be financed. Gross international assets include
the Central Bank's holdings of gold, foreign exchange (including
short-term investments), U.S. Dollar denominated Argentine
government bonds (in an amount not to exceed 30% of total assets)
and its net Asociacion Latinoamericana de Integraction ("ALADI")
claims (except overdue claims) all freely available and valued at
market prices. Under this arrangement, in which the Argentine
Peso is fully convertible into the U.S. Dollar, no increase in
the domestic monetary base can occur without an equivalent
increase in gross international assets at the one Argentine Peso
per U.S. Dollar rate; and
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(2) the elimination of the fiscal deficit and the
achievement of a surplus in the primary balance to provide funds
for the government to service its debt and thereby eliminate the
need for further borrowings.
The IMF has supported the implementation of the
Convertibility Plan and designed a financial program for the
Argentine public sector. In the event of any noncompliance with
the program, Argentina is required to consult in the first
instance with the IMF in order to obtain a waiver and, if
required, revise the program to remedy the situation. In the
second half of 1994, the Government decided to seek private
financing rather than utilize its EFF allotment for that period.
After the onset of the Mexican currency crisis, however, the
Government determined that it was necessary to seek further
funding through the EFF program, including drawing down on its
unused quota for the later part of 1994. Negotiations with the
IMF led to approval in April 1995 of economic performance waivers
for the last two quarters of 1994, an extension of the EFF credit
for a fourth year through March 30, 1996, and an increase in the
amount of the EFF credit by the equivalent of approximately US
$2.4 billion to a total of approximately US $6.3 billion.
The Convertibility Plan has simplified fiscal and market
regulations and reallocated state activities to the private
sector, thereby reducing state expenditures, increasing the
amount of federal revenues and at the same time encouraging
domestic private sector initiative and foreign investment. Since
the Convertibility Plan was introduced in March 1991, inflation
as measured by the consumer price index declined from a 27.0%
monthly rate in February 1991 to a 0.3% monthly rate in December
1992 and resulted in a 17.5% annual rate for 1992. Inflation
continued to decrease in 1994 (to 3.9%) and in 1995 (to 1.6%).
The decline in inflation continued into 1996, reaching 0.4% on an
annualized basis by the end of October 1996, according to
preliminary data.
The dismissal of Economy Minister Cavallo by President
Menem in July 1996 has had no effect on the economic priorities
of the government. There is no assurance, however, that in the
future, the Convertibility Plan will not be modified or
abandoned.
CONSUMER PRICE INDEX. The following table sets forth
for each year indicated the change in Argentine Consumer Prices
for the twelve months ended December 31, 1989-95, and the months
January through October, 1996.
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INFLATION
Consumer Prices,
Increase Over
Previous Period
1989..................................... 4,923.6
1990..................................... 1,343.9
1991..................................... 84.1
1992..................................... 17.5
1993..................................... 7.4
1994..................................... 3.9
1995(1).................................. 1.6
1996(1)..................................
January.............................. 0.3
February............................. (0.3)
March................................ (0.5)
April................................ 0.0
May.................................. (0.1)
June................................. 0.0
July................................. 0.5
August............................... (0.1)
September............................ 0.2
October.............................. 0.5
(1) In 1996, a new index was introduced called the Indice Precios
Internos al por Mayor (IPIM). The IPIM is broadly similar to
the index formerly used to determine wholesale price
inflation, but varies slightly as to the weighted average of
the goods measured in the index. The 1995 figures were also
recalculated using the new IPIM index.
___________________
Source: Banco Central de la Republica Argentina
ARGENTINE GROSS DOMESTIC PRODUCT. The following table
sets forth Argentina's GDP for the years 1989 through 1995 and
the first three quarters of 1996 at historical and constant
prices.
Gross Domestic Change from Prior
Gross Product at Year/Quarter at
Domestic Product Constant 1986 Prices Constant Prices
(millions of Argentine Pesos) (percent)
1991 180,898 10,270 8.9
1992 226,847 11,159 8.7
1993 257,570 11,832 6.0
1994 281,650 12,710 7.4
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1995 280,000 12,150 (4.4)
1996
1st Qtr N/A N/A (3.2)
2nd Qtr N/A N/A 4.8
3rd Qtr N/A N/A 6.6
_______________
Source: Banco Central de la Republica Argentina; Ministerio de
Economia y Obras y Servicios Publicos
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
GENERAL. The primary objective of the Global Dollar
Government Portfolio is to seek a high level of current income
through investing substantially all of its assets in U.S. and
non-U.S. fixed-income securities denominated only in U.S.
Dollars. As a secondary objective, the Portfolio seeks capital
appreciation. In seeking to achieve these objectives, the
Portfolio will invest at least 65% of its total assets in
fixed-income securities issued or guaranteed by foreign
governments, including participations in loans between foreign
governments and financial institutions, and interests in entities
organized and operated for the purpose of restructuring the
investment characteristics of instruments issued or guaranteed by
foreign governments ("Sovereign Debt Obligations"). The
Portfolio's investments in Sovereign Debt Obligations will
emphasize obligations of a type customarily referred to as "Brady
Bonds," that are issued as part of debt restructurings and that
are collateralized in full as to principal due at maturity by
zero coupon obligations issued by the U.S. Government, its
agencies or instrumentalities. The Portfolio may also invest up
to 35% of its total assets in U.S. corporate fixed-income
securities and non-U.S. corporate fixed-income securities. The
Portfolio will limit its investments in Sovereign Debt
Obligations, U.S. and non-U.S. corporate fixed-income securities
to U.S. dollar denominated securities.
The Portfolio may invest up to 30% of its total assets
in the Sovereign Debt Obligations and corporate fixed-income
securities of issuers in any one of Argentina, Brazil, Mexico,
Morocco, the Philippines or Venezuela, and the Portfolio will
limit investments in the Sovereign Debt Obligations of each such
country (or of any other single foreign country) to less than 25%
of its total assets. The Portfolio expects that it will not
invest more than 10% of its total assets in the Sovereign Debt
Obligations and corporate fixed-income securities of issuers in
any other single foreign country. At present, each of the above-
named countries is an "emerging market country."
In selecting and allocating assets among countries, the
Adviser will develop a long-term view of those countries and will
analyze sovereign risk by focusing on factors such as a country's
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public finances, monetary policy, external accounts, financial
markets, stability of exchange rate policy and labor conditions.
In selecting and allocating assets among corporate issuers within
a given country, the Adviser will consider the relative financial
strength of issuers and expects to emphasize investments in
securities of issuers that, in the Adviser's opinion, are
undervalued within each market sector. The Portfolio is not
required to invest any specified minimum amount of its total
assets in the securities or obligations of issuers located in any
particular country.
Sovereign Debt Obligations held by the Portfolio will
take the form of bonds, notes, bills, debentures, warrants,
short-term paper, loan participations, loan assignments and
interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of other
Sovereign Debt Obligations. Sovereign Debt Obligations held by
the Portfolio generally will not be traded on a securities
exchange. The U.S. and non-U.S. corporate fixed-income
securities held by the Portfolio will include debt securities,
convertible securities and preferred stocks of corporate issuers.
Substantially all of the Portfolio's assets will be
invested in high yield, high risk debt securities that are low-
rated (i.e., rated below Baa by Moody's or below BBB by S&P), or
of comparable quality as determined by the Adviser and unrated,
and that are considered to be predominantly speculative as
regards the issuer's capacity to pay interest and repay
principal.
INVESTMENT POLICIES
BRADY BONDS. As noted above, a significant portion of
the Portfolio's portfolio will consist of debt obligations
customarily referred to as "Brady Bonds" which are created
through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt
restructurings under a plan introduced by former U.S. Secretary
of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and,
accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Dollar-denominated, Collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are
generally collateralized in full as to principal due at maturity
by U.S. Treasury zero coupon obligations which have the same
maturity as the Brady Bonds. Interest payments on these Brady
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Bonds generally are collateralized by cash or securities in an
amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or
four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv)
any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the
event of a default with respect to Collateralized Brady Bonds as
a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent
to the scheduled maturity of the defaulted Brady Bonds which will
continue to be outstanding at which time the face amount of the
collateral will equal the principal payments which would have
then been due on the Brady Bonds in the normal course. In
addition, in light of the residual risk of Brady Bonds and, among
other factors, the history of defaults with respect to commercial
bank loans by public and private entities of countries issuing
Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Brady Plan debt restructurings totaling more than $80
billion have been implemented to date in Argentina, Bolivia,
Costa Rica, Mexico, Nigeria, the Philippines, Uruguay and
Venezuela with the largest proportion of Brady Bonds having been
issued to date by Argentina, Mexico and Venezuela. Brazil has
announced plans to issue Brady Bonds in respect of approximately
$44 billion of bank debt. On the basis of current information,
the Adviser anticipates that Brady Bonds may be issued by Brazil
in early 1994. There can be no assurance that the circumstances
regarding the issuance of Brady Bonds by Brazil will not change.
Most Argentine and Mexican Brady Bonds and a significant
portion of the Venezuelan Brady Bonds issued to date are
Collateralized Brady Bonds with interest coupon payments
collateralized on a rolling-forward basis by funds or securities
held in escrow by an agent for the bondholders. Of the other
issuers of Brady Bonds, Bolivia, Nigeria, the Philippines and
Uruguay have to date issued Collateralized Brady Bonds. While
the Adviser anticipates that Collateralized Brady Bonds will be
issued by Brazil, there can be no assurance that any such
obligations will be issued or, if so, when. Thus, at the present
time Argentina, Bolivia, Mexico, Nigeria, the Philippines,
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Uruguay and Venezuela are the only countries which have issued
Collateralized Brady Bonds.
STRUCTURED SECURITIES. The Portfolio may invest up to
25% of its total assets in interests in entities organized and
operated solely for the purpose of restructuring the investment
characteristics of Sovereign Debt Obligations. This type of
restructuring involves the deposit with or purchase by an entity,
such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that
entity of one or more classes of securities ("Structured
Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured
Securities to create securities with different investment
characteristics such as varying maturities, payment priorities
and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent
of the cash flow on the underlying instruments. Because
Structured Securities of the type in which the Portfolio
anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to
that of the underlying instruments.
The Portfolio is permitted to invest in a class of
Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class.
Subordinated Structured Securities typically have higher yields
and present greater risks than unsubordinated Structured
Securities.
Certain issuers of Structured Securities may be deemed
to be "investment companies" as defined in the 1940 Act. As a
result, the Portfolio's investment in these Structured Securities
may be limited by the restrictions contained in the 1940 Act
described in the Prospectus under "Investment in Other Investment
Companies."
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Portfolio may
invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer of Sovereign Debt
Obligations and one or more financial institutions ("Lenders").
The Portfolio's investments in Loans are expected in most
instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans
("Assignments") from third parties. The Portfolio may invest up
to 25% of its total assets in Participations and Assignments.
The government that is the borrower on the Loan will be
considered by the Portfolio to be the Issuer of a Participation
or Assignment for purposes of the Portfolio's fundamental
investment policy that it will not invest 25% or more of its
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total assets in securities of issuers conducting their principal
business activities in the same industry (i.e., foreign
government). The Portfolio's investment in Participations
typically will result in the Portfolio having a contractual
relationship only with the Lender and not with the borrower. The
Portfolio will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the
Lender selling the Participation and only upon receipt by the
Lender of the payments from the borrower. In connection with
purchasing Participations, the Portfolio generally will have no
right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Portfolio may not directly benefit
from any collateral supporting the Loan in which it has purchased
the Participation. As a result, the Portfolio may be subject to
the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the
Lender selling a Participation, the Portfolio may be treated as a
general creditor of the Lender and may not benefit from any set-
off between the Lender and the borrower. Certain Participations
may be structured in a manner designed to avoid purchasers of
Participations being subject to the credit risk of the Lender
with respect to the Participation, but even under such a
structure, in the event of the Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the
assignability of the Participation impaired. The Portfolio will
acquire Participations only the Lender interpositioned between
the Portfolio and the borrower in a Lender having total assets of
more than $25 billion and whose senior unsecured debt is rated
investment grade or higher (i.e. Baa or higher by Moody's or BBB
or higher by S&P).
When the Portfolio purchases Assignments from Lenders it
will acquire direct rights against the borrower on the Loan.
Because Assignments are arranged through private negotiations
between potential assignees and potential assignors, however, the
rights and obligations acquired by the Portfolio as the purchaser
of an assignment may differ from, and be more limited than, those
held by the assigning Lender. The assignability of certain
Sovereign Debt Obligations is restricted by the governing
documentation as to the nature of the assignee such that the only
way in which the Portfolio may acquire an interest in a Loan is
through a Participation and not an Assignment. The Portfolio may
have difficulty disposing of Assignments and Participations
because to do so it will have to assign such securities to a
third party. Because there is no liquid market for such
securities, the Portfolio anticipates that such securities could
be sold only to a limited number of institutional investors. The
lack of a liquid secondary market may have an adverse impact on
the value of such securities and the Portfolio's ability to
dispose of particular Assignments or Participations when
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necessary to meet the Portfolio's liquidity needs in response to
a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to these securities
for purposes of valuing the Portfolio's portfolio and calculating
its asset value.
U.S. AND NON-U.S. CORPORATE FIXED INCOME SECURITIES.
U.S. and non-U.S. corporate fixed-income securities include debt
securities, convertible securities and preferred stocks of
corporate issuers. Differing yields on fixed-income securities
of the same maturity are a function of several factors, including
the relative financial strength of the issuers. Higher yields
are generally available from securities in the lower rating
categories. When the spread between the yields of lower rated
obligations and those of more highly rated issues is relatively
narrow, the Portfolio may invest in the latter since they may
provide attractive returns with somewhat less risk. The
Portfolio expects to invest in investment grade securities (i.e.
securities rated Baa or better by Moody's or BBB or better by
S&P) and in high yield, high risk lower rated securities (i.e.,
securities rated lower than Baa by Moody's or BBB by S&P) and in
unrated securities of comparable credit quality. Unrated
securities will be considered for investment by the Portfolio
when the Adviser believes that the financial condition of the
issuers of such obligations and the protection afforded by the
terms of the obligations themselves limit the risk to the
Portfolio to a degree comparable to that of rated securities
which are consistent with the Portfolio's investment objectives
and policies. See "Certain Risk Considerations" for a discussion
of the risks associated with the Portfolio's investments in U.S.
and non-U.S. corporate fixed-income securities.
INTEREST RATE TRANSACTIONS. The Portfolio may enter
into interest rate swaps and may purchase or sell interest rate
caps and floors. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its
forecasts of market values, interest rates and other applicable
factors, the investment performance of the Portfolio would
diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the
Adviser is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the
asset or liability being hedged.
There is no limit on the amount of interest rate swap
transactions that may be entered into by the Portfolio. These
transactions do not involve the delivery of securities or other
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underlying assets of principal. Accordingly, the risk of loss
with respect to interest rate swaps is limited to the net amount
of interest payments that the Portfolio is contractually
obligated to make. If the other party to an interest rate swap
defaults, the Portfolio's risk of loss consists of the net amount
of interests payments that the Portfolio contractually is
entitled to receive. The Portfolio may purchase and sell (i.e.,
write) caps and floors without limitation, subject to the
segregated account requirement described in the Prospectus under
"-- Other Investment Policies and Techniques -- Interest Rate
Transactions."
FORWARD COMMITMENTS. The Portfolio may enter into
forward commitments for the purchase or sale of securities. Such
transactions may include purchases on a "when-issued" basis or
purchases or sales on a "delayed delivery" basis. In some cases,
a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring (i.e., a "when, as
and if issued" trade).
OPTIONS. The Portfolio may write covered put and call
options and purchase put and call options on securities of the
types in which it is permitted to invest that are traded on U.S.
and foreign securities exchanges. The Portfolio may also write
call options for cross-hedging purposes. There are no specific
limitations on the Fund's writing and purchasing of options.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. For
additional information on the use, risks and costs of options,
see Appendix D.
The Portfolio may purchase or write options on
securities of the types in which it is permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. The
Portfolio will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written by the Portfolio in negotiated transactions
are illiquid and it may not be possible for the Portfolio to
effect a closing transaction at a time when the Adviser believes
it would be advantageous to do so. See "Description of the Fund
- -- Additional Investment Policies and Practices -- Illiquid
Securities" in the Fund's Prospectus.
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OPTIONS ON SECURITIES INDICES. The Portfolio may
purchase and sell exchange-traded index options on any securities
index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a
security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option.
There are no specific limitations on the Portfolio's purchasing
and selling of options on securities indices.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's portfolio securities probably will not correlate
perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
REPURCHASE AGREEMENTS. For information regarding
repurchase agreements, see "Other Investment Policies -
Repurchase Agreements," below.
ILLIQUID SECURITIES. The fund has adopted the following
investment policy which may be changed by the vote of the Board
of Directors.
The Portfolio will not invest in illiquid
securities if immediately after such investment more than 15% of
the Portfolio's net assets (taken at market value) would be
invested in such securities. For this purpose, illiquid
securities include, among others, securities that are illiquid by
virtue of the absence of a readily available market or legal or
contractual restriction on resale.
For additional information regarding illiquid
securities, see "Other Investment Policies -- Illiquid
Securities," below.
INVESTMENT IN CLOSED-END INVESTMENT COMPANIES. The
Portfolio may invest in other investment companies whose
investment objectives and policies are consistent with those of
the Portfolio. In accordance with the 1940 Act, the Portfolio
may invest up to 10% of its assets in securities of other
investment companies. In addition, under the 1940 Act, the
Portfolio may not own more than 3% of the total outstanding
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voting stock of any investment company and not more than 5% of
the Portfolio's total assets may be invested in the securities of
any investment company. If the Portfolio acquires shares in
investment companies, shareholders would bear both their
proportionate share of expenses in the Portfolio (including
advisory fees) and, indirectly, the expenses of such investment
companies (including management and advisory fees).
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading to benefit from yield disparities among
different issues of securities, to seek short-term profits during
periods of fluctuating interest rates or for other reasons. Such
trading will increase the Portfolio's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income.
The portfolio turnover rates of securities of the Portfolio for
the fiscal years ended December 31, 1995 and December 31, 1996
were 13% and 155%, respectively. Management anticipates that the
annual turnover in the Fund will not be in excess of 300%. An
annual turnover rate of 300% occurs, for example, when all of the
securities in the Portfolio's portfolio are replaced three times
in a period of one year. Such high rate of portfolio turnover
involves correspondingly greater expenses than a lower rate,
which expenses must be borne by the Fund and its shareholders.
High portfolio turnover also may result in the realization of
substantial net short-term capital gains. See "Dividends,
Distributions and Taxes" and "Portfolio Transactions."
CERTAIN RISK CONSIDERATIONS
RISKS OF FOREIGN INVESTMENTS. Foreign issuers are
subject to accounting and financial standards and requirements
that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing
on the financial statements of a foreign issuer may not reflect
its financial position or results of operations in the way they
would be reflected had the financial statement been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio will invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available abut certain
non-U.S. issuers than is available about U.S. issuers.
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Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar
developments, such as military coups, have occurred in the past
in countries in which the Portfolio will invest and could
adversely affect the Portfolio's assets should these conditions
or events recur.
Foreign investment in certain foreign securities is
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain foreign securities and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio will
invest require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that
may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors.
Certain countries other than those on which the
Portfolio will focus it investments may require governmental
approval for the repatriation of investment income, capital or
the proceeds of sales of securities by foreign investors. In
addition, if a deterioration occurs in a country's balance of
payments, the country could impose temporary restrictions on
foreign capital remittances. The Portfolio could be adversely
affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by
the application to the Portfolio of any restrictions on
investments. Investing in local markets may require the
portfolio to adopt special procedures, seek local governmental
approvals or take other actions, each of which may involve
additional costs to the Portfolio.
Income from certain investments held by the Portfolio
could be reduced by foreign income taxes, including withholding
taxes. It is impossible to determine the effective rate of
foreign tax in advance. The Portfolio's net asset value may also
be affected by changes in the rates or methods of taxation
applicable to the Portfolio or to entities in which the Portfolio
has invested. The Adviser generally will consider the cost of
any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the tax treatment
of investments held by the Portfolio will not be subject to
change.
SOVEREIGN DEBT OBLIGATIONS. No established secondary
markets may exist for many of the Sovereign Debt Obligations in
which the Portfolio will invest. Reduced secondary market
liquidity may have an adverse effect on the market price and the
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Portfolio's ability to dispose of particular instruments when
necessary to meet its liquidity requirements or in response to
specific economic events such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market
liquidity for certain Sovereign Debt Obligations may also make it
more difficult for the Portfolio to obtain accurate market
quotations for purpose of valuing its portfolio. Market
quotations are generally available on many Sovereign Debt
Obligations only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for
actual sales.
By investing in Sovereign Debt Obligations, the
Portfolio will be exposed to the direct or indirect consequences
of political, social and economic changes in various countries.
Political changes in a country may affect the willingness of a
foreign government to make or provide for timely payments of its
obligations. The country's economic status, as reflected, among
other things, in its inflation rate, the amount of its external
debt and its gross domestic product, will also affect the
government's ability to honor its obligations.
Many countries providing investment opportunities for
the Portfolio have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue
to have adverse effects on the economies and securities markets
of certain of these countries. In an attempt to control
inflation, wage and price controls have been imposed in certain
countries.
Investing in Sovereign Debt Obligations involves
economic and political risks. The Sovereign Debt Obligations in
which the Portfolio will invest in most cases pertain to
countries that are among the world's largest debtors to
commercial banks, foreign governments, international financial
organizations and other financial institutions. In recent years,
the governments of some of these countries have encountered
difficulties in servicing their external debt obligations, which
led to defaults on certain obligations and the restructuring of
certain indebtedness. Restructuring arrangements have included,
among other things, reducing and rescheduling interest and
principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance
interest payments. Certain governments have not been able to
make payments of interest on or principal of Sovereign Debt
Obligations as those payments have come due. Obligations arising
from past restructuring agreements may affect the economic
performance and political and social stability of those issuers.
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Central banks and other governmental authorities which
control the servicing of Sovereign Debt Obligations may not be
willing or able to permit the payment of the principal or
interest when due in accordance with the terms of the
obligations. As a result, the issuers of Sovereign Debt
Obligations may default on their obligations. Defaults on
certain Sovereign Debt Obligations have occurred in the past.
Holders of certain Sovereign Debt Obligations may be requested to
participate in the restructuring and rescheduling of these
obligations and to extend further loans to the issuers. The
interests of holders of Sovereign Debt Obligations could be
adversely affected in the course of restructuring arrangements or
by certain other factors referred to below. Furthermore, some of
the participants in the secondary market for Sovereign Debt
Obligations may also be directly involved in negotiating the
terms of these arrangements and may therefore have access to
information not available to other market participants.
The ability of governments to make timely payments on
their obligations is likely to be influenced strongly by the
issuer's balance of payments, and its access to international
credits and investments. A country whose exports are
concentrated in a few commodities could be vulnerable to a
decline in the international prices of one or more of those
commodities. Increased protectionism on the part of a country's
trading partners could also adversely affect the country's
exports and diminish its trade account surplus, if any. To the
extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments
denominated in dollars could be adversely affected.
To the extent that a country develops a trade deficit,
it will need to depend on continuing loans from foreign
governments, multilateral organizations or private commercial
banks, aid payments from foreign governments and on inflows of
foreign investment. The access of a country to these forms of
external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of a government to
make payments on its obligations. In addition, the cost of
servicing debt obligations can be affected by a change in
international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically
based upon international rates.
Another factor bearing on the ability of a country to
repay Sovereign Debt Obligations is the level of the country's
international reserves. Fluctuations in the level of these
reserves can affect the amount of foreign exchange readily
available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments in its
Sovereign Debt Obligations.
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The Portfolio is permitted to invest in Sovereign Debt
Obligations that are not current in the payment of interest or
principal or are in default, so long as the Adviser believes it
to be consistent with the Portfolio's investment objectives. The
Portfolio may have limited legal recourse in the event of a
default with respect to certain Sovereign Debt Obligations it
holds. For example, remedies from defaults on certain Sovereign
Debt Obligations, unlike those on private debt, must, in some
cases, be pursued in the courts of the defaulting party itself.
Legal recourse therefore may be significantly diminished.
Bankruptcy, moratorium and other similar laws applicable to
issuers of Sovereign Debt Obligations may be substantially
different from those applicable to issuers of private debt
obligations. The political context, expressed as the willingness
of an issuer of Sovereign Debt Obligations to meet the terms of
the debt obligation, for example, is of considerable importance.
In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of
securities issued by foreign governments in the event of default
under commercial bank loan agreements.
U.S. CORPORATE FIXED INCOME SECURITIES. The U.S.
corporate fixed-income securities in which the Portfolio will
invest may include securities issued in connection with corporate
restructurings such as takeovers or leveraged buyouts, which may
pose particular risks. Securities issued to finance corporate
restructuring may have special credit risks due to the highly
leveraged conditions of the issuer. In addition, such issuers
may lose experienced management as a result of the restructuring.
Finally, the market price of such securities may be more volatile
to the extent that expected benefits from the restructuring do
not materialize. The Portfolio may also invest in U.S. corporate
fixed-income securities that are not current in the payment of
interest or principal or are in default, so long as the Adviser
believes such investment is consistent with the Portfolio's
investment objectives. The Portfolio's rights with respect to
defaults on such securities will be subject to applicable U.S.
bankruptcy, moratorium and other similar laws.
INVESTMENT RESTRICTIONS. The following restrictions,
which are applicable to the Global Dollar Government Portfolio,
supplement those set forth above and in the Prospectus, and may
not be changed without Shareholder Approval, as defined under the
caption "General Information," below.
The Portfolio may not:
1. Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
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2. Invest in companies for the purpose of exercising
control;
3. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it being the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for federal income tax purposes); or
4. (i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or interests therein and securities that are secured by
real estate, provided such securities are securities of the type
in which the Portfolio may invest; (ii) purchase or sell
commodities or commodity contracts, including futures contracts
(except forward commitment contracts or contracts for the future
acquisition or delivery of debt securities); (iii) invest in
interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
UTILITY INCOME PORTFOLIO
GENERAL. The objective of the Utility Income Portfolio
is to seek current income and capital appreciation by investing
primarily in equity and fixed-income securities of companies in
the utilities industry. The Portfolio may invest in securities
of both United States and foreign issuers, although no more than
15% of the Portfolio's total assets will be invested in issuers
of any one foreign country. The utilities industry consists of
companies engaged in (i) the manufacture, production, generation,
provision, transmission, sale and distribution of gas and
electric energy, and communications equipment and services,
including telephone, telegraph, satellite, microwave and other
companies providing communication facilities for the public, or
(ii) the provision of other utility or utility related goods and
services, including, but not limited to, entities engaged in
water provision, cogeneration, waste disposal system provision,
solid waste electric generation, independent power producers and
non-utility generators. As a matter of fundamental policy, the
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Portfolio will, under normal circumstances, invest at least 65%
of the value of its total assets in securities of companies in
the utilities industry. The Portfolio considers a company to be
in the utilities industry if, during the most recent twelve month
period, at least 50% of the company's gross revenues, on a
consolidated basis, is derived from the utilities industry. At
least 65% of the Portfolio's total assets are to be invested in
income-producing securities.
The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical
performance of securities of utilities companies. Many of these
companies have established a reputation for paying regular
quarterly dividends and for increasing their common stock
dividends over time. In evaluating particular issuers, the
Adviser will consider a number of factors, including historical
growth rates and rates of return on capital, financial condition
and resources, management skills and such industry factors as
regulatory environment and energy sources. With respect to
investments in equity securities, the Adviser will consider the
prospective growth in earnings and dividends in relation to
price/earnings ratios, yield and risk. The Adviser believes that
above-average dividend returns and below-average price/earnings
ratios are factors that not only provide current income but also
generally tend to moderate risk and to afford opportunity for
appreciation of securities owned by the Portfolio.
The Portfolio will invest in equity securities, such as
common stocks, securities convertible into common stocks and
rights and warrants to subscribe for the purchase of common
stocks and in fixed-income securities, such as bonds and
preferred stocks. The Portfolio may vary the percentage of
assets invested in any one type of security based upon the
Adviser's evaluation as to the appropriate portfolio structure
for achieving the Portfolio's investment objective under
prevailing market, economic and financial conditions. Certain
securities (such as fixed-income securities) will be selected on
the basis of their current yield, while other securities may be
purchased for their growth potential.
INVESTMENT POLICIES
CONVERTIBLE SECURITIES. Convertible securities include
bonds, debentures, corporate notes and preferred stocks that are
convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide
a stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. As with all
debt securities, the market value of convertible securities tends
to decline as interest rates increase and, conversely, to
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increase as interest rates decline. While convertible securities
generally offer lower interest or dividend yields than non-
convertible debt securities of similar quality, they do enable
the investor to benefit from increases in the market price of the
underlying common stock. When the market price of the common
stock underlying a convertible security increases, the price of
the convertible security increasingly reflects the value of the
underlying common stock and may rise accordingly. As the market
price of the underlying common stock declines, the convertible
security tends to trade increasingly on a yield basis, and thus
may not depreciate to the same extent as the underlying common
stock. Convertible securities rank senior to common stocks on an
issuer's capital structure. They are consequently of higher
quality and entail less risk than the issuer's common stock,
although the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security
sells above its value as a fixed-income security. The Portfolio
may invest up to 30% of its net assets in the convertible
securities of companies whose common stocks are eligible for
purchase by the Portfolio under the investment policies described
above and in the Prospectus.
RIGHTS OR WARRANTS. The Portfolio may invest up to 5%
of its net assets in rights or warrants which entitle the holder
to buy equity securities at a specific price for a specific
period of time, but will do so only if the equity securities
themselves are deemed appropriate by the Adviser for inclusion in
the Portfolio's investment portfolio. Rights and warrants may be
considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or
voting rights with respect to the securities which may be
purchased nor do they represent any rights in the assets of the
issuing company. Also, the value of a right or warrant does not
necessarily change with the value of the underlying securities
and a right or warrant ceases to have value if it is not
exercised prior to the expiration date.
U.S. GOVERNMENT SECURITIES. For a general description
of obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, see Appendix B.
OPTIONS. For additional information on the use, risks
and costs of options, see Appendix D.
OPTIONS ON SECURITIES INDICES. The Portfolio may
purchase and sell exchange-traded index options on any securities
index composed of the types of securities in which it may invest.
An option on a securities index is similar to an option on a
security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
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exercise of the option, an amount of cash if the closing level of
the chosen index is greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option.
There are no specific limitations on the Portfolio's purchasing
and selling of options on securities indices.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's portfolio securities probably will not correlate
perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. For
a discussion regarding futures contracts and options on futures
contracts, see "North American Government Income Portfolio --
Futures Contracts and Options on Futures Contracts," above.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix C.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix C.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The
Portfolio may purchase or sell forward foreign currency exchange
contracts ("forward contracts"). For a discussion regarding
forward foreign currency exchange contracts, see "North American
Government Income Portfolio -- Forward Foreign Currency Exchange
Contracts," above.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to the types of securities in
which it invests. For additional information regarding
repurchase agreements, see "Other Investment Policies --
Repurchase Agreements," below.
ILLIQUID SECURITIES. The Fund has adopted the following
investment policy on behalf of the Portfolio which may be changed
by the vote of the Board of Directors. The Portfolio will not
invest in illiquid securities if immediately after such
investment more than 15% of the Portfolio's net assets (taken at
market value) would be invested in such securities. For this
purpose, illiquid securities include, among others, securities
that are illiquid by virtue of the absence of a readily available
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market or legal or contractual restriction on resale. See "Other
Investment Policies -- Illiquid Securities," below, for a more
detailed discussion of the Portfolio's investment policy on
restricted securities and securities with legal or contractual
restrictions on resale.
INVESTMENT IN CLOSED-END INVESTMENT COMPANIES. The
Portfolio may invest in closed-end companies whose investment
objectives and policies are consistent with those of the
Portfolio. The Portfolio may invest up to 5% of its net assets in
securities of closed-end investment companies. However, the
Portfolio may not own more than 3% of the total outstanding
voting stock of any closed-end investment company. If the
Portfolio acquires shares in closed-end investment companies,
shareholders would bear both their proportionate share of
expenses in the Portfolio (including advisory fees) and,
indirectly, the expenses of such investment companies (including
management and advisory fees).
PORTFOLIO TURNOVER. The Portfolio may engage in active
short-term trading in connection with its investment in shorter-
term fixed-income securities in order to benefit from yield
disparities among different issues of securities, to seek short-
term profits during periods of fluctuating interest rates, or for
other reasons. Such trading will increase the Portfolio's rate
of turnover and the incidence of short-term capital gain taxable
as ordinary income. It is anticipated that the Portfolio's
annual turnover rate will not exceed 200%. The portfolio
turnover rates of the securities of the Portfolio for the fiscal
years ended December 31, 1995 and December 31, 1996 were 138% and
75%, respectively. An annual turnover rate of 200% occurs, for
example, when all of the securities in the Portfolio's portfolio
are replaced twice in a period of one year. A portfolio turnover
rate approximating 200% involves correspondingly greater
brokerage commissions than would a lower rate, which expenses
must be borne by the Portfolio and its shareholders and may
result in the Portfolio realizing most short-term capital gains
or losses than would a lower rate. See "Dividends, Distributions
and Taxes."
CERTAIN RISK CONSIDERATIONS
UTILITY COMPANY RISKS. Utility companies may be subject
to a variety of risks depending, in part, on such factors as the
type of utility involved and its geographic location. The
revenues of domestic and foreign utilities companies generally
reflect the economic growth and development in the geographic
areas in which they do business. The Adviser will take into
account anticipated economic growth rates and other economic
developments when selecting securities of utility companies. Some
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of the risks involved in investing in the principal sectors of
the utilities industry are discussed below.
Telecommunications regulation typically limits rates
charged, returns earned, providers of services, types of
services, ownership, areas served and terms for dealing with
competitors and customers. Telecommunications regulation
generally has tended to be less stringent for newer services,
such as mobile services, than for traditional telephone service,
although there can be no assurances that such newer services will
not be heavily regulated in the future. Regulation may limit
rates based on an authorized level of earnings, a price index, or
some other formula. Telephone rate regulation may include
government-mandated cross-subsidies that limit the flexibility of
existing service providers to respond to competition. Regulation
may also limit the use of new technologies and hamper efficient
depreciation of existing assets. If regulation limits the use of
new technologies by established carriers or forces cross-
subsidies, large private networks may emerge.
Many gas utilities generally have been adversely
affected by oversupply conditions, and by increased competition
from other providers of utility services. In addition, some gas
utilities entered into long-term contracts with respect to the
purchase or sale of gas at fixed prices, which prices have since
changed significantly in the open market. In many cases, such
price changes have been to the disadvantage of the gas utility.
Gas utilities are particularly susceptible to supply and demand
imbalances due to unpredictable climate conditions and other
factors and are subject to regulatory risks as well.
Electric utilities that utilize coal in connection with
the production of electric power are particularly susceptible to
environmental regulation, including the requirements of the
federal Clean Air Act and of similar state laws. Such regulation
may necessitate large capital expenditures in order for the
utility to achieve compliance. Due to the public, regulatory and
governmental concern with the cost and safety of nuclear power
facilities in general, certain electric utilities with
uncompleted nuclear power facilities may have problems completing
and licensing such facilities. Regulatory changes with respect
to nuclear and conventionally fueled generating facilities could
increase costs or impair the ability of such electric utilities
to operate such facilities, thus reducing their ability to
service dividend payments with respect to the securities they
issue. Electric utilities that utilize nuclear power facilities
must apply for recommissioning from the Nuclear Regulatory
Commission after 40 years. Failure to obtain recommissioning
could result in an interruption of service or the need to
purchase more expensive power from other entities and could
subject the utility to significant capital construction costs in
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connection with building new nuclear or alternative-fuel power
facilities, upgrading existing facilities or converting such
facilities to alternative fuels.
INVESTMENTS IN LOWER-RATED FIXED-INCOME SECURITIES.
Adverse publicity and investor perceptions about lower-rated
securities, whether or not based on fundamental analysis, may
tend to decrease the market value and liquidity of such lower-
rated securities. The Adviser will try to reduce the risk
inherent in investment in lower-rated securities through credit
analysis, diversification and attention to current developments
and trends in interest rates and economic and political
conditions. However, there can be no assurance that losses will
not occur. Since the risk of default is higher for lower-rated
securities, the Adviser's research and credit analysis are a
correspondingly important aspect of its program for managing the
Portfolio's securities than would be the case if the Portfolio
did not invest in lower-rated securities. In considering
investments for the Portfolio, the Adviser will attempt to
identify those high-risk, high-yield securities whose financial
condition is adequate to meet future obligations, has improved or
is expected to improve in the future. The Adviser's analysis
focuses on relative values based on such factors as interest or
dividend coverage, asset coverage earnings prospects, and the
experience and managerial strength of the issuer.
Non-rated securities will also be considered for
investment by the Portfolio when the Adviser believes that the
financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Portfolio to a degree comparable to that
of rated securities which are consistent with the Portfolio's
objective and policies.
In seeking to achieve the Portfolio's objective, there
will be times, such as during periods of rising interest rates,
when depreciation and realization of capital losses on securities
in the portfolio will be unavoidable. Moreover, medium- and
lower- rated securities and non-rated securities of comparable
quality may be subject to wider fluctuations in yield and market
values than higher-rated securities under certain market
conditions. Such fluctuations after a security is acquired do
not affect the cash income received from that security but are
reflected in the net asset value of the Portfolio.
INVESTMENT RESTRICTIONS. The following restrictions
which are applicable to the Utility Income Portfolio, supplement
those set forth above and in the Prospectus, may not be changed
without Shareholder Approval, as defined under the caption
"General Information," below. The Portfolio may not:
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(1) Make loans except through (i) the purchase of
debt obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
(2) Participate on a joint or joint and several
basis in any securities trading account;
(3) Invest in companies for the purpose of
exercising control;
(4) Issue any senior security within the meaning
of the Act except that the Portfolio may write put and call
options;
(5) Make short sales of securities or maintain a
short position, unless at all times when a short position is open
it owns an equal amount of such securities or securities
convertible into or exchangeable for, without payment of any
further consideration, securities of the same issue as, and equal
in amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes); or
(6)(i) Purchase or sell real estate, except that it
may purchase and sell securities of companies which deal in real
estate or interests therein; (ii) purchase or sell commodities or
commodity contracts (except currencies, futures contracts on
currencies and related options, forward contracts or contracts
for the future acquisition or delivery of securities and related
options, futures contracts and options on futures contracts and
options on futures contracts and other similar contracts); (iii)
invest in interests in oil, gas, or other mineral exploration or
development programs; (iv) purchase securities on margin, except
for such short-term credits as may be necessary for the clearance
of transactions; and (v) act as an underwriter of securities,
except that the Portfolio may acquire restricted securities under
circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of
the Securities Act.
CONSERVATIVE INVESTORS PORTFOLIO
GROWTH INVESTORS PORTFOLIO
GROWTH PORTFOLIO
For a general description of the Portfolios' investment
policies, see the Fund's Prospectus.
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REPURCHASE AGREEMENTS. Repurchase agreements are
agreements by which a Portfolio purchases a security and obtains
a simultaneous commitment from the seller to repurchase the
security at an agreed upon price and date. The resale price is
in excess of the purchase price and reflects an agreed upon
market rate unrelated to the coupon rate on the purchased
security. The purchased security serves as collateral for the
obligation of the seller to repurchase the security and the value
of the purchased security is initially greater than or equal to
the amount of the repurchase obligation and the seller is
required to furnish additional collateral on a daily basis in
order to maintain with the purchaser securities with a value
greater than or equal to the amount of the repurchase obligation.
Such transactions afford the Portfolios the opportunity to earn a
return on temporarily available cash. While at times the
underlying security may be a bill, certificate of indebtedness,
note, or bond issued by an agency, authority or instrumentality
of the United States Government, the obligation of the seller is
not guaranteed by the U.S. Government and there is a risk that
the seller may fail to repurchase the underlying security,
whether because of the seller's bankruptcy or otherwise. In such
event, the Portfolios would attempt to exercise their rights with
respect to the underlying security, including possible
disposition in the market. However, the Portfolios may be
subject to various delays and risks of loss, including (a)
possible declines in the value of the underlying security during
the period while the Portfolios seek to enforce their rights
thereto, (b) possible reduced levels of income and lack of access
to income during this period and (c) inability to enforce rights
and the expenses involved in the attempted enforcement. The
Portfolios have established standards for the creditworthiness of
parties with which they may enter into repurchase agreements, and
those standards, as modified from time to time, will be
implemented and monitored by the Adviser.
NON-PUBLICLY TRADED SECURITIES. Each of the Portfolios
may invest in securities which are not publicly traded, including
securities sold pursuant to Rule 144A under the Securities Act of
1933 ("Rule 144A Securities"). The sale of these securities is
usually restricted under Federal securities laws, and market
quotations may not be readily available. As a result, a
Portfolio may not be able to sell these securities (other than
Rule 144A Securities) unless they are registered under applicable
Federal and state securities laws, or may have to sell such
securities at less than fair market value. Investment in these
securities is restricted to 5% of a Portfolio's total assets
(excluding, to the extent permitted by applicable law, Rule 144A
Securities) and is also subject to the restriction against
investing more than 15% of total assets in "illiquid" securities.
To the extent permitted by applicable law, Rule 144A Securities
will not be treated as "illiquid" for purposes of the foregoing
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restriction so long as such securities meet the liquidity
guidelines established by the Fund's Board of Directors.
Pursuant to these guidelines, the Adviser will monitor the
liquidity of a Portfolio's investment in Rule 144A Securities
and, in reaching liquidity decisions, will consider: (1) the
frequency of trades and quotes for the security; (2) the number
of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to
make a market in the security; and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and
the mechanics of the transfer).
FOREIGN SECURITIES. Each of the Portfolios, may invest
without limit in securities of foreign issuers which are not
publicly traded in the United States, although each of these
Portfolios generally will not invest more than 15% of its total
assets (30% in the case of the Growth Investors Portfolio) in
such securities. Investment in foreign issuers or securities
principally outside the United States may involve certain special
risks due to foreign economic, political, diplomatic and legal
developments, including favorable or unfavorable changes in
currency exchange rates, exchange control regulations (including
currency blockage), expropriation of assets or nationalization,
confiscatory taxation, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in
obtaining and enforcing judgments against foreign entities.
Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The securities of
some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable
U.S. companies and U.S. securities markets. Foreign brokerage
commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which
apply to securities of foreign issuers and securities principally
traded overseas.
DESCRIPTION OF CERTAIN MONEY MARKET SECURITIES
IN WHICH THE PORTFOLIOS MAY INVEST
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND BANK
TIME DEPOSITS. Certificates of deposit are receipts issued by a
bank in exchange for the deposit of funds. The issuer agrees to
pay the amount deposited plus interest to the bearer of the
receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior
to maturity.
Bankers' acceptances typically arise from short-term
credit arrangements designed to enable businesses to obtain funds
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to finance commercial transactions. Generally, an acceptance is
a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise.
The draft is then "accepted" by another bank that, in effect,
unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held
by the accepting bank as an earning asset or it may be sold in
the secondary market at the going rate of discount for a specific
maturity. Although maturities for acceptances can be as long as
270 days, most maturities are six months or less.
Bank time deposits are funds kept on deposit with a bank
for a stated period of time in an interest bearing account. At
present, bank time deposits maturing in more than seven days are
not considered by the Adviser to be readily marketable.
COMMERCIAL PAPER. Commercial paper consists of short-
term (usually from 1 to 270 days) unsecured promissory notes
issued by entities in order to finance their current operations.
VARIABLE NOTES. Variable amounts master demand notes
and variable amount floating rate notes are obligations that
permit the investment of fluctuating amounts by a Portfolio at
varying rates of interest pursuant to direct arrangements between
a Portfolio, as lender, and the borrower. Master demand notes
permit daily fluctuations in the interest rate while the interest
rate under variable amount floating rate notes fluctuate on a
weekly basis. These notes permit daily changes in the amounts
borrowed. The Portfolios have the right to increase the amount
under these notes at any time up to the full amount provided by
the note agreement, or to decrease the amount, and the borrower
may repay up to the full amount of the notes without penalty.
Because these types of notes are direct lending arrangements
between the lender and the borrower, it is not generally
contemplated that such instruments will be traded and there is no
secondary market for these notes. Master demand notes are
redeemable (and, thus, immediately repayable by the borrower) at
face value, plus accrued interest, at any time. Variable amount
floating rate notes are subject to next-day redemption for 14
days after the initial investment therein. With both types of
notes, therefore, the Portfolios' right to redeem depends on the
ability of the borrower to pay principal and interest on demand.
In connection with both types of note arrangements, the
Portfolios consider earning power, cash flow and other liquidity
ratios of the issuer. These notes, as such, are not typically
rated by credit rating agencies. Unless they are so rated, a
Portfolio may invest in them only if at the time of an investment
the issuer has an outstanding issue of unsecured debt rated Aa or
better by Moody's or AA or better by S&P.
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A description of Moody's and S&P's short-term note
ratings is included as Appendix A to this Statement of Additional
Information.
ASSET-BACKED SECURITIES. The Conservative Investors
Portfolio and the Growth Investors Portfolio may invest in asset-
backed securities (unrelated to first mortgage loans) which
represent fractional interests in pools of retail installment
loans, leases or revolving credit receivables, both secured (such
as Certificates for Automobiles Receivables or "CARS") and
unsecured (such as Credit Care Receivables Securities or
"CARDS"). These assets are generally held by a trust and
payments of principal and interest or interest only are passed
through monthly or quarterly to certificate holders and may be
guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee
or originator of the trust.
Like mortgages underlying mortgage-backed securities,
underlying automobile sales contracts or credit card receivables
are subject to prepayment, which may reduce the overall return to
certificate holders. Nevertheless, principal repayment rates
tend not to vary too much with interest rates, and the short-term
nature of the underlying car loans or receivables tends to dampen
the impact of any change in the prepayment level. Certificate
holders may also experience delays in payment if the full amounts
due on underlying sales contracts or receivables are not realized
by the trust holding the obligations because of unanticipated
legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If
consistent with their investment objectives and policies, the
Portfolios may invest in other asset-backed securities that may
be developed in the future.
The staff of the Commission is of the view that certain
asset-backed securities may constitute investment companies under
the 1940 Act. The Portfolios intend to conduct their operations
in a manner consistent with this view, and therefore they
generally may not invest more than 10% of their total assets in
such securities without obtaining appropriate regulatory relief.
LENDING OF SECURITIES. Each Portfolio may seek to
increase its income by lending portfolio securities. Under
present regulatory policies, including those of the Board of
Governors of the Federal Reserve System and the Commission, such
loans may be made only to member firms of the New York Stock
Exchange and would be required to be secured continuously by
collateral in cash, cash equivalents, or U.S. Treasury Bills
maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Portfolio would have
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the right to call a loan and obtain the securities loaned at any
time on five days' notice. During the existence of a loan, a
Portfolio would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned
and would also receive compensation based on investment of the
collateral. A Portfolio would not, however, have the right to
vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important
vote to be taken among holders of the securities or of the giving
or withholding of their consent on a material matter affecting
the investment. As with other extensions of credit there are
risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which can be earned
currently from securities loans of this type justifies the
attendant risk. If the Adviser determines to make securities
loans, it is not intended that the value of the securities loaned
would exceed 25% of the value of a Portfolio's total assets.
FORWARD COMMITMENTS AND WHEN-ISSUED AND DELAYED DELIVERY
SECURITIES. Each of the Portfolios may enter into forward
commitments for the purchase of securities and may purchase
securities on a "when-issued" or "delayed delivery" basis.
Agreements for such purchases might be entered into, for example,
when a Portfolio anticipates a decline in interest rates and is
able to obtain a more advantageous yield by committing currently
to purchase securities to be issued later. When a Portfolio
purchases securities in this manner (i.e., on a forward
commitment, when-issued or delayed delivery basis), it does not
pay for the securities until they are received, and a Portfolio
is required to create a segregated account with the Portfolio's
custodian and to maintain in that account cash, U.S. Government
securities or other liquid high-grade debt obligations in an
amount equal to or greater than, on a daily basis, the amount of
the Portfolio's forward commitments and when-issued or-delayed
delivery commitments.
A Portfolio will enter into forward commitments and make
commitments to purchase securities on a when-issued or delayed
delivery basis only with the intention of actually acquiring the
securities. However, a Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter
of investment strategy.
Although none of the Portfolios intends to make such
purchases for speculative purposes and each Portfolio intends to
adhere to the provisions of policies of the Commission, purchases
of securities on such bases may involve more risk than other
types of purchases. For example, by committing to purchase
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securities in the future, a Portfolio subjects itself to a risk
of loss on such commitments as well as on its portfolio
securities. Also, a Portfolio may have to sell assets which have
been set aside in order to meet redemptions. In addition, if a
Portfolio determines it is advisable as a matter of investment
strategy to sell the forward commitment or "when-issued" or
"delayed delivery" securities before delivery, that Portfolio may
incur a gain or loss because of market fluctuations since the
time the commitment to purchase such securities was made. Any
such gain or loss would be treated as a capital gain or loss and
would be treated for tax purposes as such. When the time comes to
pay for the securities to be purchased under a forward commitment
or on a "when-issued" or "delayed delivery" basis, a Portfolio
will meet its obligations from the then available cash flow or
the sale of securities, or, although it would not normally expect
to do so, from the sale of the forward commitment or "when-
issued" or "delayed delivery" securities themselves (which may
have a value greater or less than a Portfolio's payment
obligation).
OPTIONS. As noted in the Prospectuses, each of the
Portfolios may write call and put options and may purchase call
and put options on securities. Each Portfolio intends to write
only covered options. This means that so long as a Portfolio is
obligated as the writer of a call option, it will own the
underlying securities subject to the option or securities
convertible into such securities without additional consideration
(or for additional cash consideration held in a segregated
account by the Custodian). In the case of call options on U.S.
Treasury Bills, a Portfolio might own U.S. Treasury Bills of a
different series from those underlying the call option, but with
a principal amount and value corresponding to the option contract
amount and a maturity date no later than that of the securities
deliverable under the call option. A Portfolio will be
considered "covered" with respect to a put option it writes, if,
so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian in a segregated account
cash, U.S. Government securities or other liquid high-grade debt
obligations having a value equal to or greater than the exercise
price of the option.
Effecting a closing transaction in the case of a written
call option will permit a Portfolio to write another call option
on the underlying security with either a different exercise price
or expiration date or both, or in the case of a written put
option will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by deposited
cash or short-term securities. Such transactions permit a
Portfolio to generate additional premium income, which will
partially offset declines in the value of portfolio securities or
increases in the cost of securities to be acquired. Also,
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effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option
to be used for other investments by a Portfolio, provided that
another option on such security is not written. If a Portfolio
desires to sell a particular security from its portfolio on which
it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent
with the sale of the security.
A Portfolio will realize a profit from a closing
transaction if the premium paid in connection with the closing of
an option written by the Portfolio is less than the premium
received from writing the option, or if the premium received in
connection with the closing of an option purchased by the
Portfolio is more than the premium paid for the original
purchase. Conversely, a Portfolio will suffer a loss if the
premium paid or received in connection with a closing transaction
is more or less, respectively, than the premium received or paid
in establishing the option position. Because increases in the
market price of a call option will generally reflect increases in
the market price of the underlying security, any loss resulting
from the repurchase of a call option previously written by a
Portfolio is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Portfolio
A Portfolio may purchase a security and then write a
call option against that security or may purchase a security and
concurrently write an option on it. The exercise price of the
call a Portfolio determines to write will depend upon the
expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value
of the underlying security at the time the option is written.
In-the-money call options may be used when it is expected that
the price of the underlying security will decline moderately
during the option period. Out-of-the-money call options may be
written when it is expected that the premiums received from
writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such
transactions, a Portfolio's maximum gain will be the premium
received by it for writing the option, adjusted upwards or
downwards by the difference between the Portfolio's purchase
price of the security and the exercise price. If the options are
not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely,
by the premium received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
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the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and a Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, a Portfolio may elect to
close the position or retain the option until it is exercised, at
which time the Portfolio will be required to take delivery of the
security at the exercise price; the Portfolio's return will be
the premium received from the put option minus the amount by
which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money put
options may be written when it is expected that the price of the
underlying security will decline moderately during the option
period. In-the-money put options may be used when it is expected
that the premiums received from writing the put option plus the
appreciation in the market price of the underlying security up to
the exercise price will be greater than the appreciation in the
price of the underlying security alone.
Each of the Portfolios may also write combinations of
put and call options on the same security, known as "straddles,"
with the same exercise and expiration date. By writing a
straddle, a Portfolio undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the
options is exercised. If the price of the security subsequently
rises above the exercise price, the call will likely be exercised
and the Portfolio will be required to sell the underlying
security at a below market price. This loss may be offset,
however, in whole or part, by the premiums received on the
writing of the two options. Conversely, if the price of the
security declines by a sufficient amount, the put will likely be
exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable
and neither the call nor the put is exercised. In those
instances where one of the options is exercised, the loss on the
purchase or sale of the underlying security may exceed the amount
of the premiums received.
By writing a call option, a Portfolio limits its
opportunity to profit from any increase in the market value of
the underlying security above the exercise price of the option.
By writing a put option, a Portfolio assumes the risk that it may
be required to purchase the underlying security for an exercise
price above its then current market value, resulting in a capital
loss unless the security subsequently appreciates in value.
Where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of
portfolio securities or against increases in the value of
securities to be acquired, up to the amount of the premium.
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Each of the above Portfolios may purchase put options to
hedge against a decline in the value of portfolio securities. If
such decline occurs, the put options will permit the Portfolio to
sell the securities at the exercise price, or to close out the
options at a profit. By using put options in this way, a
Portfolio will reduce any profit it might otherwise have realized
in the underlying security by the amount of the premium paid for
the put option and by transaction costs.
A Portfolio may purchase call options to hedge against
an increase in the price of securities that the Portfolio
anticipates purchasing in the future. If such increase occurs,
the call option will permit the Portfolio to purchase the
securities at the exercise price, or to close out the options at
a profit. The premium paid for the call option plus any
transaction costs will reduce the benefit, if any, realized by a
Portfolio upon exercise of the option, and, unless the price of
the underlying security rises sufficiently, the option may expire
worthless to the Portfolio and the Portfolio will suffer a loss
on the transaction to the extent of the premium paid.
OPTIONS ON SECURITIES INDEXES. Each of the Portfolios
may write (sell) covered call and put options on securities
indexes and purchase call and put options on securities indexes.
A call option on a securities index is considered covered if, so
long as a Portfolio is obligated as the writer of the call, the
Portfolio holds in its portfolio securities the price changes of
which are, in the option of the Adviser, expected to replicate
substantially the movement of the index or indexes upon which the
options written by the Portfolio are based. A put on a
securities index written by a Portfolio will be considered
covered if, so long as it is obligated as the writer of the put,
the Portfolio segregates with its custodian cash, U.S. Government
securities or other liquid high-grade debt obligations having a
value equal to or greater than the exercise price of the option.
A Portfolio may also purchase put options on securities
indexes to hedge its investments against a decline in value. By
purchasing a put option on a securities index, a Portfolio will
seek to offset a decline in the value of securities it owns
through appreciation of the put option. If the value of a
Portfolio's investments does not decline as anticipated, or if
the value of the option does not increase, the Portfolio's loss
will be limited to the premium paid for the option. The success
of this strategy will largely depend on the accuracy of the
correlation between the changes in value of the index and the
changes in value of a Portfolio's security holdings.
The purchase of call options on securities indexes may
be used by a Portfolio to attempt to reduce the risk of missing a
broad market advance, or an advance in an industry or market
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segment, at a time when the Portfolio holds uninvested cash or
short-term debt securities awaiting investment. When purchasing
call options for this purpose, a Portfolio will also bear the
risk of losing all or a portion of the premium paid if the value
of the index does not rise. The purchase of call options on
stock indexes when a Portfolio is substantially fully invested is
a form of leverage, up to the amount of the premium and related
transaction costs, and involves risks of loss and of increased
volatility similar to those involved in purchasing calls on
securities the Portfolio owns.
FUTURES CONTRACTS AND OPTIONS ON FUTURE CONTRACTS. Each
of the Conservative Investors Portfolio and the Growth Investors
Portfolio may enter into interest rate futures contracts. In
addition, each of the Conservative Investors Portfolio, the
Growth Investors Portfolio and the Growth Portfolio may enter
into stock futures contracts, and each of these Portfolios may
enter into foreign currency futures contracts. (Unless otherwise
specified, interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts are collectively
referred to as "Futures Contracts.") Such investment strategies
will be used as a hedge and not for speculation.
Purchases or sales of stock or bond index futures
contracts are used for hedging purposes to attempt to protect a
Portfolio's current or intended investments from broad
fluctuations in stock or bond prices. For example, a Portfolio
may sell stock or bond index futures contracts in anticipation of
or during a market decline to attempt to offset the decrease in
market value of the Portfolio's securities portfolio that might
otherwise result. If such decline occurs, the loss in value of
portfolio securities may be offset, in whole or part, by gains on
the futures position. When a Portfolio is not fully invested in
the securities market and anticipates a significant market
advance, it may purchase stock or bond index futures contracts in
order to gain rapid market exposure that may, in part or
entirely, offset increases in the cost of securities that the
Portfolio intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts
will be closed out. Each of the Conservative Investors
Portfolio, the Growth Investors Portfolio and the Growth
Portfolio generally intends to purchase such securities upon
termination of the futures position, but under unusual market
conditions a long futures position may be terminated without a
related purchase of securities.
Interest rate futures contracts are purchased or sold
for hedging purposes to attempt to protect against the effects of
interest rate changes on a Portfolio's current or intended
investments in fixed-income securities. For example, if a
Portfolio owned long-term bonds and interest rates were expected
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to increase, that Portfolio might sell interest rate futures
contracts. Such a sale would have much the same effect as
selling some of the long-term bonds in that Portfolio's
portfolio. However, since the futures market is more liquid than
the cash market, the use of interest rate futures contracts as a
hedging technique allows a Portfolio to hedge its interest rate
risk without having to sell its portfolio securities. If
interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Portfolio's
interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the net asset value
of that Portfolio from declining as much as it otherwise would
have. On the other hand, if interest rates were expected to
decline, interest rate futures contracts could be purchased to
hedge in anticipation of subsequent purchases of long-term bonds
at higher prices. Because the fluctuations in the value of the
interest rate futures contracts should be similar to those of
long-term bonds, a Portfolio could protect itself against the
effects of the anticipated rise in the value of long-term bonds
without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the
interest rate futures contracts could be liquidated and that
Portfolio's cash reserves could then be used to buy long-term
bonds on the cash market.
Each of the Growth Portfolio, the Conservative Investors
Portfolio and the Growth Investors Portfolio may purchase and
sell foreign currency futures contracts for hedging purposes to
attempt to protect its current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could
reduce the dollar value of portfolio securities denominated in
foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities
in the currencies in which they are denominated remains constant.
Each of the Growth Portfolio, the Conservative Investors
Portfolio and the Growth Investors Portfolio may sell futures
contracts on a foreign currency, for example, when it holds
securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In
the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in
whole or in part, by gains on the futures contracts. However, if
the value of the foreign currency increases relative to the
dollar, the Portfolio's loss on the foreign currency futures
contract may or may not be offset by an increase in the value of
the securities because a decline in the price of the security
stated in terms of the foreign currency may be greater than the
increase in value as a result of the change in exchange rates.
Conversely, these Portfolios could protect against a
rise in the dollar cost of foreign-denominated securities to be
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acquired by purchasing futures contracts on the relevant
currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value
of the underlying currencies. When a Portfolio purchases futures
contracts under such circumstances, however, and the price of
securities to be acquired instead declines as a result of
appreciation of the dollar, the Portfolio will sustain losses on
its futures position which could reduce or eliminate the benefits
of the reduced cost of portfolio securities to be acquired.
The Portfolios may also engage in currency "cross
hedging" when, in the opinion of the Adviser, the historical
relationship among foreign currencies suggests that a Portfolio
may achieve protection against fluctuations in currency exchange
rates similar to that described above at a reduced cost through
the use of a futures contract relating to a currency other than
the U.S. dollar or the currency in which the foreign security is
denominated. Such "cross hedging" is subject to the same risk as
those described above with respect to an unanticipated increase
or decline in the value of the subject currency relative to the
dollar.
Each of the Conservative Investors Portfolio and the
Growth Investors Portfolio may purchase and write options on
interest rate futures contracts. In addition, each of the
Growth Portfolio, the Conservative Investors Portfolio and the
Growth Investors Portfolio may purchase and write options on
stock index futures contracts. The Growth Portfolio, the
Conservative Investors Portfolio and the Growth Investors
Portfolio may purchase and write options on foreign currency
futures contracts. (Unless otherwise specified, options on
interest rate futures contracts, options on securities index
futures contracts and options on foreign currency futures
contracts are collectively referred to as "Options on Futures
Contracts.")
The writing of a call option on a Futures Contract
constitutes a partial hedge against declining prices of the
securities in the Portfolio's portfolio. If the futures price at
expiration of the option is below the exercise price, a Portfolio
will retain the full amount of the option premium, which provides
a partial hedge against any decline that may have occurred in the
Portfolio's portfolio holdings. The writing of a put option on a
Futures Contract constitutes a partial hedge against increasing
prices of the securities or other instruments required to be
delivered under the terms of the Futures Contract. If the
futures price at expiration of the put option is higher than the
exercise price, a Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any
increase in the price of securities which the Portfolio intends
to purchase. If a put or call option a Portfolio has written is
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exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options on
futures positions, a Portfolio's losses from exercised options on
futures may to some extent be reduced or increased by changes in
the value of portfolio securities.
The Portfolios may purchase Options on Futures Contracts
for hedging purposes instead of purchasing or selling the
underlying Futures Contracts. For example, where a decrease in
the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange
rates, a Portfolio could, in lieu of selling Futures Contracts,
purchase put options thereon. In the event that such decrease
occurs, it may be offset, in whole or part, by a profit on the
option. If the market decline does not occur, the Portfolio will
suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a
Portfolio will increase prior to acquisition, due to a market
advance or changes in interest or exchange rates, a Portfolio
could purchase call Options on Futures Contracts, rather than
purchasing the underlying Futures Contracts. If the market
advances, the increased cost of securities to be purchased may be
offset by a profit on the call. However, if the market declines,
the Portfolio will suffer a loss equal to the price of the call,
but the securities which the Portfolio intends to purchase may be
less expensive.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of
the Portfolios and the Growth Investors Portfolio may enter into
forward foreign currency exchange contracts ("Forward Contracts")
to attempt to minimize the risk to the Portfolio from adverse
changes in the relationship between the U.S. dollar and foreign
currencies. The Portfolios intend to enter into Forward
Contracts for hedging purposes similar to those described above
in connection with their transactions in foreign currency futures
contracts. In particular, a Forward Contract to sell a currency
may be entered into in lieu of the sale of a foreign currency
futures contract where a Portfolio seeks to protect against an
anticipated increase in the exchange rate for a specific currency
which could reduce the dollar value of portfolio securities
denominated in such currency. Conversely, a Portfolio may enter
into a Forward Contract to purchase a given currency to protect
against a projected increase in the dollar value of securities
denominated in such currency which the Portfolio intends to
acquire. A Portfolio also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in
connection with a fixed-income security denominated in a foreign
currency. The Portfolios may engage in currency "cross hedging"
when, in the opinion of the Adviser, the historical relationship
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among foreign currencies suggests that a Portfolio may achieve
the same protection for a foreign security at a reduced cost
through the use of a Forward Contract relating to a currency
other than the U.S. dollar or the foreign currency in which the
security is denominated.
If a hedging transaction in Forward Contracts is
successful, the decline in the value of portfolio securities or
the increase in the cost of securities to be acquired may be
offset, at least in part, by profits on the Forward Contract.
Nevertheless, by entering into such Forward Contracts, a
Portfolio may be required to forego all or a portion of the
benefits which otherwise could have been obtained from favorable
movements in exchange rates. The Portfolios do not presently
intend to hold Forward Contracts entered into until maturity, at
which time they would be required to deliver or accept delivery
of the underlying currency, but will seek in most instances to
close out positions in such contracts by entering into offsetting
transactions, which will serve to fix a Portfolio's profit or
loss based upon the value of the Contracts at the time the
offsetting transaction is executed.
Each Portfolio has established procedures consistent
with SEC policies concerning purchases of foreign currency
through Forward Contracts. Since those policies currently
recommend that an amount of a Portfolio's assets equal to the
amount of the purchase be held aside or segregated to be used to
pay for the commitment, a Portfolio will always have cash, U.S.
Government securities or other liquid equivalents or high-grade
debt securities available sufficient to cover any commitments
under these contracts or to limit any potential risk.
OPTIONS ON FOREIGN CURRENCIES. Each of the Portfolios
may purchase and write options on foreign currencies for hedging
purposes. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio
securities, these Portfolios may purchase put options on the
foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed
amount in dollars and will thereby offset, in whole or in part,
the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, these
Portfolios may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the
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adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to a Portfolio deriving
from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, a Portfolio could sustain
losses on transactions in foreign currency options which would
require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Each of the Portfolios may write options on foreign
currencies for the same types of hedging purposes or to increase
return. For example, where the Portfolio anticipates a decline
in the dollar value of foreign-denominated securities due to
adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar cost of securities
to be acquired, a Portfolio could write a put option on the
relevant currency, which, if rates move in the manner projected,
will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case
of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised
and the Portfolio will be required to purchase or sell the
underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign
currencies, a Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS FUTURES AND FORWARD
TRANSACTIONS. The Portfolios' abilities effectively to hedge all
or a portion of their portfolios through transactions in options,
Futures Contracts, Options on Futures Contracts, Forward
Contracts and options on foreign currencies-depend on the degree
to which price movements in the underlying index or instrument
correlate with price movements in the relevant portion of the
Portfolios' portfolios or securities the Portfolios intend to
purchase. In the case of futures and options based on an index,
the portfolio will not duplicate the components of the index, and
in the case of futures and options on fixed-income securities,
the portfolio securities which are being hedged may not be the
same type of obligation underlying such contract. As a result,
the correlation probably will not be exact. Consequently, the
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Portfolios bear the risk that the price of the portfolio
securities being hedged will not move by the same amount or in
the same direction as the underlying index or obligation.
For example, if a Portfolio purchases a put option on an
index and the index decreases less than the value of the hedged
securities, the Portfolio will experience a loss that is not
completely offset by the put option. It is also possible that
there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the
Portfolio has a position and the portfolio securities the
Portfolio is attempting to hedge, which could result in a loss on
both the portfolio and the hedging instrument.
It should be noted that stock index futures contracts or
options based upon a narrower index of securities, such as those
of a particular industry group, may present greater risk than
options or futures based on a broad market index. This is due to
the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a
small number of securities.
The trading of futures and options entails the
additional risk of imperfect correlation between movements in the
futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be
distorted due to the differences in the nature of the markets,
such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the futures
market. In this regard, trading by speculators in futures and
options has in the past occasionally resulted in market
distortions, which may be difficult or impossible to predict,
particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails
the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option.
The risk of imperfect correlation, however, generally tends to
diminish as the maturity date of the Futures Contract or
expiration date of the option approaches.
Further, with respect to options on securities, options
on foreign currencies, options on stock indexes and Options on
Futures Contracts, the Portfolios are subject to the risk of
market movements between the time that the option is exercised
and the time of performance thereunder. This could increase the
extent of any loss suffered by a Portfolio in connection with
such transactions.
If a Portfolio purchases futures or options in order to
hedge against a possible increase in the price of securities
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before the Portfolio is able to invest its cash in such
securities, the Portfolio faces the risk that the market may
instead decline. If the Portfolio does not then invest in such
securities because of concern as to possible further market
declines or for other reasons, the Portfolio may realize a loss
on the futures or option contract that is not offset by a
reduction in the price of securities purchased.
In writing a call option on a security, foreign
currency, index or futures contract, a Portfolio also incurs the
risk that changes in the value of the assets used to cover the
position will not correlate closely with changes in the value of
the option or underlying index or instrument. For example, when
a Portfolio writes a call option on a stock index, the securities
used as "cover" may not match the composition of the index, and
the Portfolio may not be fully covered. As a result, the
Portfolio could suffer a loss on the call which is not entirely
offset or offset at all by an increase in the value of the
Portfolio's portfolio securities.
The writing of options on securities, options on stock
indexes or Options on Futures Contracts constitutes only a
partial hedge against fluctuations in the value of a Portfolio's
portfolio. When a Portfolio writes an option, it will receive
premium income in return for the holder's purchase of the right
to acquire or dispose of the underlying security or future or, in
the case of index options, cash. In the event that the price of
such obligation does not rise sufficiently above the exercise
price of the option, in the case of a call, or fall below the
exercise price, in the case of a put, the option will not be
exercised and the Portfolio will retain the amount of the
premium, which will constitute a partial hedge against any
decline that may have occurred in the Portfolio's portfolio
holdings, or against the increase in the cost of the instruments
to be acquired.
When the price of the underlying obligation moves
sufficiently in favor of the holder to warrant exercise of the
option, however, and the option is exercised, the Portfolio will
incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, a
Portfolio may be required to forego the benefits which might
otherwise have been obtained from an increase in the value of
portfolio securities or a decline in the value of securities to
be acquired.
In the event of the occurrence of any of the foregoing
adverse market events, a Portfolio's overall return may be lower
than if it had not engaged in the transactions described above.
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With respect to the writing of straddles on securities,
a Portfolio incurs the risk that the price of the underlying
security will not remain stable, that one of the options written
will be exercised and that the resulting loss will not be offset
by the amount of the premiums received. Such transactions,
therefore, while creating an opportunity for increased return by
providing a Portfolio with two simultaneous premiums on the same
security, nonetheless involve additional risk, because the
Portfolio may have an option exercised against it regardless of
whether the price of the security increases or decreases.
Prior to exercise or expiration, a futures or option
position can be terminated only by entering into a closing
purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial
transaction was entered into. While the Portfolios will enter
into options or futures positions only if there appears to be a
liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any
specific time. In that event, it may not be possible to close
out a position held by a Portfolio, and the Portfolio could be
required to purchase or sell the instrument underlying an option,
make or receive a cash settlement or meet ongoing variation
margin requirements. Under such circumstances, if the Portfolio
has insufficient cash available to meet margin requirements, it
may be necessary to liquidate portfolio securities at a time when
it is disadvantageous to do so. The inability to close out
options and futures positions, therefore, could have an adverse
impact on the Portfolios' ability to effectively hedge their
portfolios, and could result in trading losses.
The liquidity of a secondary market in a Futures
Contract or option thereon may be adversely affected by "daily
price fluctuation limits," established by exchanges, which limit
the amount of fluctuation in the price of a contract during a
single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the
limit, thus preventing the liquidation of open futures or option
positions and requiring traders to make additional margin
deposits. Prices have in the past moved to the daily limit on a
number of consecutive trading days.
The trading of Futures Contracts and options (including
Options on Futures Contracts) is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment
failures, government intervention, insolvency of a brokerage firm
or clearing house or other disruptions of normal trading
activity, which could at times make it difficult or impossible to
liquidate existing positions or to recover excess variation
margin payments.
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The staff of the Commission had taken the position that
over-the-counter options and the assets used as cover for over-
the-counter options are illiquid securities, unless certain
arrangements are made with the other party to the option contract
permitting the prompt liquidation of the option position. The
Portfolios will enter into those special arrangements only with
primary U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York ("primary dealers"). In
connection with these special arrangements, the Fund will
establish standards for the creditworthiness of the primary
dealers with which it may enter into over-the-counter option
contracts and those standards, as modified from time to time,
will be implemented and monitored by the Adviser. Under these
special arrangements, the Fund will enter into contracts with
primary dealers which provide that each Portfolio has the
absolute right to repurchase an option it writes at any time at a
repurchase price which represents fair market value, as
determined in good faith through negotiation between the parties,
but which in no event will exceed a price determined pursuant to
a formula contained in the contract. Although the specific
details of the formula may vary between contracts with different
primary dealers, the formula will generally be based on a
multiple of the premium received by the Portfolio for writing the
option, plus the amount, if any, by which the option is "in-the-
money." The formula will also include a factor to account for
the difference between the price of the security and the strike
price of the option if the option is written out-of-the-money.
Under such circumstances the Portfolio will treat as illiquid the
securities used as cover for over-the-counter options it has
written only to the extent described in the Prospectuses.
Although each agreement will provide that the Portfolio's
repurchase price shall be determined in good faith (and that it
shall not exceed the maximum determined pursuant to the formula),
the formula price will not necessarily reflect the market value
of the option written; therefore, the Portfolio might pay more to
repurchase the option contract than the Portfolio would pay to
close out a similar exchange-traded option.
Because of low initial margin deposits made upon the
opening of a futures position and the writing of an option, such
transactions involve substantial leverage. As a result,
relatively small movements in the price of the contract can
result in substantial unrealized gains or losses. However, to
the extent the Portfolios purchase or sell Futures Contracts and
Options on Futures Contracts and purchase and write options on
securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging
strategy is successful, be offset, in whole or in part, by
increases in the value of securities held by the Portfolio or
decreases in the prices of securities the Portfolio intends to
acquire. When a Portfolio writes options on securities or
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options on stock indexes for other than hedging purposes, the
margin requirements associated with such transactions could
expose the Portfolio to greater risk.
The exchanges on which futures and options are traded
may impose limitations governing the maximum number of positions
on the same side of the market and involving the same underlying
instrument which may be held by a single investor, whether acting
alone or in concert with others (regardless of whether such
contracts are held on the same or different exchanges or held or
written in one or more accounts or through one or more brokers).
In addition, the CFTC and the various contract markets have
established limits referred to as "speculative position limits"
on the maximum net long or net short position which any person
may hold or control in a particular futures or option contract.
An exchange may order the liquidation of positions found to be in
violation of these limits and may impose other sanctions or
restrictions. The Adviser does not believe that these trading
and position limits will have any adverse impact on the
strategies for hedging the portfolios of the Portfolios.
The amount of risk a Portfolio assumes when it purchases
an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from
an option purchased, however, it may be necessary to exercise the
option and to liquidate the underlying Futures Contract, subject
to the risks of the availability of a liquid offset market
described herein. The writer of an Option on a Futures Contract
is subject to the risks of commodity futures trading, including
the requirement of initial and variation margin payments, as well
as the additional risk that movements in the price of the option
may not correlate with movements in the price of the underlying
security, index, currency or Futures Contract.
Transactions in Forward Contracts, as well as futures
and options on foreign currencies, are subject to all of the
correlation, liquidity and other risks outlined above. In
addition, however, such transactions are subject to the risk of
governmental actions affecting trading in or the prices of
currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on
the value of positions held by a Portfolio. In addition, the
value of such positions could be adversely affected by a number
of other complex political and economic factors applicable to the
countries issuing the underlying currencies.
Further, unlike trading in most other types of
instruments, there is no systematic reporting of last sale
information with respect to the foreign currencies underlying
contracts thereon. As a result, the available information on
which trading decisions will be based may not be as complete as
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the comparable data on which a Portfolio makes investment and
trading decisions in connection with other transactions.
Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which
will not be reflected in the forward, futures or options markets
until the following day, thereby preventing the Portfolios from
responding to such events in a timely manner.
Settlements of exercises of over-the-counter Forward
Contracts or foreign currency options generally must occur within
the country issuing the underlying currency, which in turn
requires traders to accept or make delivery of such currencies in
conformity with any United Sates or foreign restrictions and
regulations regarding the maintenance of foreign banking
relationships and fees, taxes or other charges.
Unlike transactions entered into by the Portfolios in
Futures Contracts and exchange-traded options, options on foreign
currencies, Forward Contracts and over-the-counter options on
securities are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options)
the Commission. Such instruments are instead traded through
financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to regulation by the
Commission. In an over-the-counter trading environment, many of
the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer could lose amounts
substantially in excess of the initial investment, due to the
margin and collateral requirements associated with such
positions.
In addition, over-the-counter transactions can be
entered into only with a financial institution willing to take
the opposite side, as principal, of a Portfolio's position unless
the institution acts as broker and is able to find another
counterparty willing to enter into the transaction with the
Portfolio. Where no such counterparty is available, it will not
be possible to enter into a desired transaction. There also may
be no liquid secondary market in the trading of over-the-counter
contracts, and a Portfolio could be required to retain options
purchased or written, or Forward Contracts entered into, until
exercise, expiration or maturity. This in turn could limit the
Portfolio's ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
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Further, over-the-counter transactions are not subject
to the guarantee of an exchange clearing house, and a Portfolio
will therefore be subject to the risk of default by, or the
bankruptcy of, the financial institution serving as its
counterparty. One or more such institutions also may decide to
discontinue their role as market-makers in a particular currency
or security, thereby restricting the Portfolio's ability to enter
into desired hedging transactions. A Portfolio will enter into
an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the
Adviser.
Transactions in over-the-counter options on foreign
currencies are subject to a number of conditions regarding the
commercial purpose of the purchaser of such option. The
Portfolios are not able to determine at this time whether or to
what extent additional restrictions on the trading of over-the-
counter options on foreign currencies may be imposed at some
point in the future, or the effect that any such restrictions may
have on the hedging strategies to be implemented by them.
As discussed below, CFTC regulations require that a
Portfolio not enter into transactions in commodity futures
contracts or commodity option contracts for which the aggregate
initial margin and premiums exceed 5% of the fair market value of
the Portfolio's assets. Premiums paid to purchase over-the-
counter options on foreign currencies, and margins paid in
connection with the writing of such options, are required to be
included in determining compliance with this requirement, which
could, depending upon the existing positions in Futures Contracts
and Options on Futures Contracts already entered into by a
Portfolio, limit the Portfolio's ability to purchase or write
options on foreign currencies. Conversely, the existence of open
positions in options on foreign currencies could limit the
ability of the Portfolio to enter into desired transactions in
other options or futures contracts.
While Forward Contracts are not presently subject to
regulation by the CFTC, the CFTC may in the future assert or be
granted authority to regulate such instruments. In such event,
the Portfolio's ability to utilize Forward Contracts in the
manner set forth above could be restricted.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the
Commission, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on
organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option
positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation
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("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than
in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, the
margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition,
exchange-traded options on foreign currencies involve certain
risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, if
it determines that foreign governmental restrictions or taxes
would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its
clearing member, the OCC may impose special procedures on
exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS.
Under applicable regulations of the CFTC, when a Portfolio enters
into transactions in Futures Contracts and Options on Futures
Contracts other than for bona fide hedging purposes, that
Portfolio maintains with its custodian in a segregated account
cash, short-term U.S. Government securities or high quality
United States dollar denominated money market instruments, which,
together with any initial margin deposits, are equal to the
aggregate market value of the Futures Contracts and Options on
Futures Contracts that it purchases. In addition, a Portfolio
may not purchase or sell such instruments if, immediately
thereafter, the sum of the amount of initial margin deposits on
the Portfolio's existing futures and options positions and
premiums paid for options purchased would exceed 5% of the market
value of the Portfolio's total assets.
Each Portfolio has adopted the additional restriction
that it will not enter into a Futures Contract if, immediately
thereafter, the value of securities and other obligations
underlying all such Futures Contracts would exceed 50% of the
value of such Portfolio's total assets. Moreover, a Portfolio
will not purchase put and call options if as a result more than
10% of its total assets would be invested in such options.
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When a Portfolio purchases a Futures Contract, an amount
of cash and cash equivalents will be deposited in a segregated
account with the Fund's Custodian so that the amount so
segregated will at all times equal the value of the Futures
Contract, thereby insuring that the use of such futures is
unleveraged.
ECONOMIC EFFECTS AND LIMITATIONS. Income earned by a
Portfolio from its hedging activities will be treated as capital
gain and, if not offset by net realized capital losses incurred
by a Portfolio, will be distributed to shareholders in taxable
distributions. Although gain from futures and options
transactions may hedge against a decline in the value of a
Portfolio's portfolio securities, that gain, to the extent not
offset by losses, will be distributed in light of certain tax
considerations and will constitute a distribution of that portion
of the value preserved against decline.
No Portfolio will "over-hedge," that is, a Portfolio
will not maintain open short positions in futures or options
contracts if, in the aggregate, the market value of its open
positions exceeds the current market value of its securities
portfolio plus or minus the unrealized gain or loss on such open
positions, adjusted for the historical volatility relationship
between the portfolio and futures and options contracts
Each Portfolio's ability to employ the options and
futures strategies described above will depend on the
availability of liquid markets in such instruments. Markets in
financial futures and related options are still developing. It
is impossible to predict the amount of trading interest that may
hereafter exist in various types of options or futures.
Therefore no assurance can be given that a Portfolio will be able
to use these instruments effectively for the purposes set forth
above. In addition, a Portfolio's ability to engage in options
and futures transactions may be materially limited by tax
considerations.
The Portfolios' ability to use options, futures and
forward contracts may be limited by tax considerations. In
particular, tax rules might affect the length of time for which
the Portfolios can hold such contracts and the character of the
income earned on such contracts. In addition, differences
between each Portfolio's book income (upon the basis of which
distributions are generally made) and taxable income arising from
its hedging activities may result in return of capital
distributions, and in some circumstances, distributions in excess
of the Portfolio's book income may be required in order to meet
tax requirements.
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FUTURE DEVELOPMENTS. The above discussion relates to
each Portfolio's proposed use of futures contracts, options and
options on futures contracts currently available. As noted
above, the relevant markets and related regulations are still in
the developing stage. In the event of future regulatory or
market developments, each Portfolio may also use additional types
of futures contracts or options and other investment techniques
for the purposes set forth above.
PORTFOLIO TURNOVER. The Adviser manages each
Portfolio's portfolio by buying and selling securities to help
attain its investment objective. The portfolio turnover rate for
each Portfolio for their respective fiscal years ended
December 31, 1995 was 61% for Conservative Investors Portfolio,
50% for Growth Investors Portfolio and 86% for Growth Portfolio.
The portfolio turnover rate for each Portfolio for their
respective fiscal years ended December 31, 1996 was 211% for
Conservative Investors Portfolio, 160% for Growth Investors
Portfolio and 98% for Growth Portfolio. A high portfolio
turnover rate will involve greater costs to a Portfolio
(including brokerage commissions and transaction costs) and may
also result in the realization of taxable capital gains,
including short-term capital gains taxable at ordinary income
rates. See "Dividends, Distributions and Taxes" and "Portfolio
Transactions" below.
INVESTMENT RESTRICTIONS. Except as described below and
except as otherwise specifically stated in the Prospectus or this
Statement of Additional Information, the investment policies of
each Portfolio set forth in the Prospectus and in this Statement
of Additional Information are not fundamental and may be changed
without shareholder approval.
The following is a description of restrictions on the
investments to be made by the Portfolios, which restrictions may
not be changed without the approval of a majority of the
outstanding voting securities of the relevant Portfolio.
None of the Portfolios will:
(1) Borrow money in excess of lot of the value (taken
at the lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or pending settlement of securities transactions or
for extraordinary or emergency purposes.
(2) Underwrite securities issued by other persons
except to the extent that, in connection with the disposition of
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its portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
(3) Purchase or retain real estate or interests in real
estate, although each Portfolio may purchase securities which are
secured by real estate and securities of companies which invest
in or deal in real estate.
(4) Make loans to other persons except by the purchase
of obligations in which such Portfolio may invest consistent with
its investment policies and by entering into repurchase
agreements, or by lending its portfolio securities representing
not more than 25% of its total assets.
(5) Issue any senior security (as that term is defined
in the 1940 Act), if such issuance is specifically prohibited by
the 1940 Act or the rules and regulations promulgated thereunder.
For the purposes of this restriction, collateral arrangements
with respect to options, Futures Contracts and Options on Futures
Contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior
security. (There is no intention to issue senior securities
except as set forth in paragraph 1 above.)
It is also a fundamental policy of each Portfolio that
it may purchase and sell futures contracts and related options.
In addition, the following is a description of operating
policies which the Fund has adopted on behalf of the Portfolios
but which are not fundamental and are subject to change without
shareholder approval.
None of the Portfolios will:
(a) Pledge, mortgage, hypothecate or otherwise encumber
an amount of its assets taken at current value in excess of 15%
of its total assets (taken at the lower of cost or current value)
and then only to secure borrowings permitted by restriction (1)
above. For the purpose of this restriction, the deposit of
securities and other collateral arrangements with respect to
reverse repurchase agreements, options, Futures Contracts,
Forward Contracts and options on foreign currencies, and payments
of initial and variation margin in connection therewith are not
considered pledges or other encumbrances.
(b) Purchase securities on margin, except that each
Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities, and
except that each Portfolio may make margin payments in connection
with Futures Contracts, Options on Futures Contracts, options,
Forward Contracts or options on foreign currencies.
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(c) Make short sales of securities or maintain a short
position for the account of such Portfolio unless at all times
when a short position is open it owns an equal amount of such
securities or unless by virtue of its ownership of other
securities it has at all such times a right to obtain securities
(without payment of further consideration) equivalent in kind and
amount to the securities sold, provided that if such right is
conditional the sale is made upon equivalent conditions and
further provided that no Portfolio will make such short sales
with respect to securities having a value in excess of 5% of its
total assets.
(d) Write, purchase or sell any put or call option or
any combination thereof, provided that this shall not prevent a
Portfolio from writing, purchasing and selling puts, calls or
combinations thereof with respect to securities, indexes of
securities or foreign currencies, and with respect to Futures
Contracts.
(e) Purchase voting securities of any issuer if such
purchase, at the time thereof, would cause more than 10% of the
outstanding voting securities of such issuer to be held by such
Portfolio; or purchase securities of any issuer if such purchase
at the time thereof would cause more than 10% of any class of
securities of such issuer to be held by such Portfolio. For this
purpose all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a
single class.
(f) Invest in securities of any issuer if, to the
knowledge of the Fund, officers and Directors of such Fund and
officers and directors of the Adviser who beneficially own more
than 0.5% of the shares of securities of that issuer together own
more than 5%.
(g) Invest more than 5% of its assets in the securities
of any one investment company, own more than 3% of any one
investment company's outstanding voting securities or have total
holdings of investment company securities in excess of 10% of the
value of the Portfolio's assets except that the Growth Portfolio
will not purchase securities issued by any other registered
investment company or investment trust except (A) by purchase in
the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary
broker's commission, or (B) where no commission or profit to a
sponsor or dealer results from such purchase, or (C) when such
purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that the Portfolio
will not purchase such securities if such purchase at the time
thereof would cause more than 5% of its total assets (taken at
market value) to be invested in the securities of such issuers;
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and, provided further, that the Portfolio's purchases of
securities issued by an open-end investment company will be
consistent with the provisions of the 1940 Act.
(h) Make investments for the purpose of exercising
control or management.
(i) Participate on a joint or joint and several basis
in any trading account in securities.
(j) Invest in interests in oil, gas, or other mineral
exploration or development programs, although each Portfolio may
purchase securities which are secured by such interests and may
purchase securities of issuers which invest in or deal in oil,
gas or other mineral exploration or development programs.
(k) Purchase warrants, if, as a result, a Portfolio
would have more than 5% of its total assets invested in warrants
or more than 28 of its total assets invested in warrants which
are not listed on the New York Stock Exchange or the American
Stock Exchange.
(l) Purchase commodities or commodity contracts,
provided that this shall not prevent a Portfolio from entering
into interest rate futures contracts, securities index futures
contracts, foreign currency futures contracts, forward foreign
currency exchange contracts and options (including options on any
of the foregoing) to the extent such action is consistent with
such Portfolio's investment objective and policies.
(m) Purchase additional securities in excess of 5% of
the value of its total assets until all of a Portfolio's
outstanding borrowings (as permitted and described in Restriction
No. 1 above) have been repaid.
Whenever any investment restriction-states a maximum
percentage of a Portfolio's assets which may be invested in any
security or other asset, it is intended that such maximum
percentage limitation be determined immediately after and as a
result of such Portfolio's acquisition of such securities or
other assets. Accordingly, any later increase or decrease beyond
the specified limitation resulting from a change in value or net
asset value will not be considered a violation of such percentage
limitation.
WORLDWIDE PRIVATIZATION PORTFOLIO
Worldwide Privatization Portfolio seeks long term
capital appreciation. In seeking to achieve its investment
objective, as a fundamental policy, the Portfolio will invest at
least 65% of its total assets in equity securities that are
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issued by enterprises that are undergoing, or that have
undergone, privatization as described below, although normally,
significantly more of the Portfolio's total assets will be
invested in such securities. The balance of the Portfolio's
investment portfolio will include securities of companies that
are believed by the Adviser to be beneficiaries of the
privatization process. Equity securities include common stock,
preferred stock, rights or warrants to subscribe for or purchase
common or preferred stock, securities (including debt securities)
convertible into common or preferred stock and securities that
give the holder the right to acquire common or preferred stock.
The Portfolio is designed for individual investors
desiring to take advantage of investment opportunities,
historically inaccessible to U.S. investors, that are created by
privatizations of state enterprises in both established and
developing economies, including those in Western Europe and
Scandinavia, Australia, New Zealand, Latin America, Asia and
Eastern and Central Europe and, to a lesser degree, Canada and
the United States. In the opinion of the Adviser, substantial
potential for appreciation in the value of equity securities of
an enterprise undergoing or following privatization exists as the
enterprise rationalizes its management structure, operations and
business strategy to position itself to compete efficiently in a
market economy, and the Portfolio will seek to emphasize
investments in the equity securities of such enterprises.
A major premise of the Portfolio's investment approach
is that, because of the particular characteristics of privatized
companies, their equity securities offer investors opportunities
for significant capital appreciation. In particular, because
privatization programs are an important part of a country's
economic restructuring, equity securities that are brought to the
market by means of initial equity offerings frequently are priced
to attract investment in order to secure the issuer's successful
transition to private sector ownership. In addition, these
enterprises generally tend to enjoy dominant market positions in
their local markets. Because of the relaxation of government
controls upon privatization, these enterprises typically have the
potential for significant managerial and operational efficiency
gains, which, among other factors, can increase their earnings
due to the restructuring that accompanies privatization and the
incentives management frequently receives.
The following investment policies and restrictions
supplement, and should be read in conjunction with the
information set forth in the Prospectus of the Portfolio under
the heading "Description of the Portfolio." Except as otherwise
noted, the Portfolio's investment policies described below are
not designated "fundamental policies" within the meaning of the
Investment Company Act of 1940 (the "1940 Act") and, therefore,
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may be changed by the Directors of the Portfolio without a
shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to
shareholders.
INVESTMENT POLICIES
DEBT SECURITIES AND CONVERTIBLE DEBT SECURITIES. The
Portfolio may invest up to 35% of its total assets in debt
securities and convertible debt securities of issuers whose
common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Debt securities include
bonds, debentures, corporate notes and preferred stocks.
Convertible debt securities are such instruments that are
convertible at a stated exchange rate into common stock. Prior
to their conversion, convertible securities have the same general
characteristics as non-convertible debt securities which provide
a stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. The market
value of debt securities and convertible debt securities tends to
decline as interest rates increase and, conversely, to increase
as interest rates decline. While convertible securities
generally offer lower interest yields than non-convertible debt
securities of similar quality, they do enable the investor to
benefit from increases in the market price of the underlying
common stock.
When the market price of the common stock underlying a
convertible security increases, the price of the convertible
security increasingly reflects the value of the underlying common
stock and may rise accordingly. As the market price of the
underlying common stock declines, the convertible security tends
to trade increasingly on a yield basis, and thus may not
depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an
issuer's capital structure. They are consequently of higher
quality and entail less risk than the issuer's common stock,
although the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security
sells above its value as a fixed-income security.
The Portfolio may maintain not more than 5% of its net
assets in debt securities rated below Baa by Moody's and BBB by
S&P, or, if not rated, determined by the Adviser to be of
equivalent quality. The Portfolio will not purchase a debt
security that, at the time of purchase, is rated below B by
Moody's and S&P, or determined by the Adviser to be of equivalent
quality, but may retain a debt security the rating of which drops
below B. See "Special Risk Considerations" below.
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OPTIONS. The Portfolio may write covered put and call
options and purchase put and call options on securities of the
types in which it is permitted to invest that are traded on U.S.
and foreign securities exchanges and over-the-counter, including
options on market indices. The Portfolio will only write
"covered" put and call options, unless such options are written
for cross-hedging purposes. There are no specific limitations on
the Portfolio's writing and purchasing of options.
If a put option written by the Portfolio were exercised,
the Portfolio would be obligated to purchase the underlying
security at the exercise price. If a call option written by the
Portfolio were exercised, the Portfolio would be obligated to
sell the underlying security at the exercise price. For
additional information on the use, risks and costs of options,
see Appendix D.
The Portfolio may purchase or write options on
securities of the types in which it is permitted to invest in
privately negotiated (i.e., over-the-counter) transactions. The
Portfolio will effect such transactions only with investment
dealers and other financial institutions (such as commercial
banks or savings and loan institutions) deemed creditworthy by
the Adviser, and the Adviser has adopted procedures for
monitoring the creditworthiness of such entities. Options
purchased or written by the Portfolio in negotiated transactions
are illiquid and it may not be possible for the Portfolio to
effect a closing transaction at a time when the Adviser believes
it would be advantageous to do so. See "Description of the
Portfolio -- Additional Investment Policies and Practices --
Illiquid Securities" in the Portfolio's Prospectus.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. For
a discussion regarding futures contracts and options on futures
contracts, see "North American Government Income Portfolio --
Futures Contracts and Options on Futures Contracts," above.
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix C.
OPTIONS ON FOREIGN CURRENCIES. For additional
information on the use, risks and costs of options on foreign
currencies, see Appendix C.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. For a
discussion regarding forward foreign currency exchange contracts,
see "North American Government Income Portfolio -- Forward
Foreign Currency Exchange Contracts," above.
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FORWARD COMMITMENTS. No forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets. For a
discussion regarding forward commitments, see "Other Investment
Policies -- Forward Commitments," below.
SECURITIES NOT READILY MARKETABLE. The Portfolio may
invest up to 15% of its net assets in illiquid securities which
include, among others, securities for which there is no readily
available market. The Portfolio may therefore not be able to
readily sell such securities. Such securities are unlike
securities which are traded in the open market and which can be
expected to be sold immediately if the market is adequate. The
sale price of securities not readily marketable may be lower or
higher than the Adviser's most recent estimate of their fair
value. Generally, less public information is available with
respect to the issuers of such securities than with respect to
companies whose securities are traded on an exchange. Securities
not readily marketable are more likely to be issued by small
businesses and therefore subject to greater economic, business
and market risks than the listed securities of more well-
established companies. Adverse conditions in the public
securities markets may at certain times preclude a public
offering of an issuer's securities. To the extent that the
Portfolio makes any privately negotiated investments in state
enterprises, such investments are likely to be in securities that
are not readily marketable. It is the intention of the Portfolio
to make such investments when the Adviser believes there is a
reasonable expectation that the Portfolio would be able to
dispose of its investment within three years. There is no law in
a number of the countries in which the Portfolio may invest
similar to the U.S. Securities Act of 1933 (the "1933 Act")
requiring an issuer to register the public sale of securities
with a governmental agency or imposing legal restrictions on
resales of securities, either as to length of time the securities
may be held or manner of resale. However, there may be
contractual restrictions on resale of securities. In addition,
many countries do not have informational disclosure requirements
similar in scope to those required under the U.S. Securities
Exchange Act of 1934.
REPURCHASE AGREEMENTS. The Portfolio may invest in
repurchase agreements pertaining to U.S. Government Securities.
For additional information regarding repurchase agreements, see
"Other Investment Policies -- Repurchase Agreements," below.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to purchase securities with
a view to holding them for periods of time sufficient to assure
that the Portfolio will realize less than 30% of its gross income
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from the sale or other disposition of securities held for less
than three months (see "Dividends, Distributions and Taxes") and
to hold its securities for six months or longer. However, it is
also the Portfolio's policy to sell any security whenever, in the
judgment of the Adviser, its appreciation possibilities have been
substantially realized or the business or market prospects for
such security have deteriorated, irrespective of the length of
time that such security has been held. The Adviser anticipates
that the Portfolio's annual rate of portfolio turnover will not
exceed 200%. A 200% annual turnover rate would occur if all the
securities in the Portfolio's portfolio were replaced twice
within a period of one year. The turnover rate has a direct
effect on the transaction costs to be borne by the Portfolio, and
as portfolio turnover increases it is more likely that the
Portfolio will realize short-term capital gains. The portfolio
turnover rates for the fiscal years ended December 31, 1995 and
December 31, 1996 were 23% and 47%, respectively.
SPECIAL RISK CONSIDERATIONS
Investment in the Portfolio involves the special risk
considerations described below.
RISKS OF FOREIGN INVESTMENT
Participation in Privatizations. The governments of
certain foreign countries have, to varying degrees, embarked on
privatization programs contemplating the sale of all or part of
their interests in state enterprises. In certain jurisdictions,
the ability of foreign entities, such as the Portfolio, to
participate in privatizations may be limited by local law, or the
price or terms on which the Portfolio may be able to participate
may be less advantageous than for local investors. Moreover,
there can be no assurance that governments that have embarked on
privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be
successful or that governments will not re-nationalize
enterprises that have been privatized.
RISK OF SALE OR CONTROL BY MAJOR STOCKHOLDERS. In the
case of the enterprises in which the Portfolio may invest, large
blocks of the stock of those enterprises may be held by a small
group of stockholders, even after the initial equity offerings by
those enterprises. The sale of some portion or all of those
blocks could have an adverse effect on the price of the stock of
any such enterprise.
RECENT MANAGEMENT REORGANIZATION. Prior to making an
initial equity offering, most state enterprises or former state
enterprises go through an internal reorganization of management.
Such reorganizations are made in an attempt to better enable
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these enterprises to compete in the private sector. However,
certain reorganizations could result in a management team that
does not function as well as the enterprise's prior management
and may have a negative effect on such enterprise. In addition,
the privatization of an enterprise by its government may occur
over a number of years, with the government continuing to hold a
controlling position in the enterprise even after the initial
equity offering for the enterprise.
LOSS OF GOVERNMENT SUPPORT. Prior to privatization,
most of the state enterprises in which the Portfolio may invest
enjoy the protection of and receive preferential treatment from
the respective sovereigns that own or control them. After making
an initial equity offering these enterprises may no longer have
such protection or receive such preferential treatment and may
become subject to market competition from which they were
previously protected. Some of these enterprises may not be able
to effectively operate in a competitive market and may suffer
losses or experience bankruptcy due to such competition.
CURRENCY CONSIDERATIONS. Because substantially all of
the Portfolio's assets will be invested in securities denominated
in foreign currencies and a corresponding portion of the
Portfolio's revenues will be received in such currencies, the
dollar equivalent of the Portfolio's net assets and distributions
will be adversely affected by reductions in the value of certain
foreign currencies relative to the U.S. dollar. Such changes
will also affect the Portfolio's income. The Portfolio will,
however, have the ability to protect itself against adverse
changes in the values of foreign currencies by engaging in
certain of the investment practices listed above. If the value
of the foreign currencies in which the Portfolio receives its
income falls relative to the U.S. dollar between receipt of the
income and the making of Portfolio distributions, the Portfolio
may be required to liquidate securities in order to make
distributions if the Portfolio has insufficient cash in U.S.
dollars to meet distribution requirements. Similarly, if an
exchange rate declines between the time the Portfolio incurs
expenses in U.S. dollars and the time cash expenses are paid, the
amount of the currency required to be converted into U.S. dollars
in order to pay expenses in U.S. dollars could be greater than
the equivalent amount of such expenses in the currency at the
time they were incurred.
MARKET CHARACTERISTICS. The securities markets of many
foreign countries are relatively small, with the majority of
market capitalization and trading volume concentrated in a
limited number of companies representing a small number of
industries. Consequently, the Portfolio's investment portfolio
may experience greater price volatility and significantly lower
liquidity than a portfolio invested in equity securities of U.S.
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companies. These markets may be subject to greater influence by
adverse events generally affecting the market, and by large
investors trading significant blocks of securities, than is usual
in the United States. Securities settlements may in some
instances be subject to delays and related administrative
uncertainties.
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled to varying degrees. These
restrictions or controls may at times limit or preclude
investment in certain securities and may increase the cost and
expenses of the Portfolio. As illustrations, certain countries
require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in
a particular company, or limit the investment by foreign persons
to only a specific class of securities of a company which may
have less advantageous terms than securities of the company
available for purchase by nationals or impose additional taxes on
foreign investors. The national policies of certain countries
may restrict investment opportunities in issuers deemed sensitive
to national interests. In addition, the repatriation of
investment income, capital or the proceeds of sales of securities
from certain of the countries is controlled under regulations,
including in some cases the need for certain advance government
notification or authority. In addition, if a deterioration
occurs in a country's balance of payments, the country could
impose temporary restrictions on foreign capital remittances.
The Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other
restrictions on investment. The liquidity of the Portfolio's
investments in any country in which any of these factors exist
could be affected and the Adviser will monitor the affect of any
such factor or factors on the Portfolio's investments. Investing
in local markets may require the Portfolio to adopt special
procedures, seek local governmental approvals or other actions,
any of which may involve additional costs to the Portfolio.
CORPORATE DISCLOSURE STANDARDS. Issues of securities in
foreign jurisdictions are generally not subject to the same
degree of regulation as are U.S. issuers with respect to such
matters as insider trading rules, restrictions on market
manipulation, shareholder proxy requirements and timely
disclosure of information. The reporting, accounting and
auditing standards of foreign countries may differ from U.S.
standards in important respects and less information may be
available to investors in foreign securities than to investors in
U.S. securities.
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Foreign issuers are subject to accounting, auditing and
financial standards and requirements that differ, in some cases
significantly, from those applicable to U.S. issuers. In
particular, the assets and profits appearing on the financial
statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be
reflected had the financial statements been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio will invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available about
certain non-U.S. issuers than is available about U.S. issuers.
TRANSACTION COSTS. Transaction costs including
brokerage commissions for transactions both on and off the
securities exchanges in many foreign countries are generally
higher than in the United States.
U.S. AND FOREIGN TAXES. Foreign taxes paid by the
Portfolio may be creditable or deductible by U.S. shareholders
for U.S. income tax purposes. No assurance can be given that
applicable tax laws and interpretations will not change in the
future. Moreover, non-U.S. investors may not be able to credit
or deduct such foreign taxes. Investors should review carefully
the information discussed under the heading "Dividends,
Distributions and Taxes" and should discuss with their tax
advisers the specific tax consequences of investing in the
Portfolio.
ECONOMIC POLITICAL AND LEGAL RISKS. The economies of
individual foreign countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross
domestic product or gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of
payments position. Nationalization, expropriation or
confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability or
diplomatic developments could affect adversely the economy of a
foreign country or the Portfolio's investments in such country.
In the event of expropriation, nationalization or other
confiscation, the Portfolio could lose its entire investment in
the country involved. In addition, laws in foreign countries
governing business organizations, bankruptcy and insolvency may
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provide less protection to security holders such as the Portfolio
than that provided by U.S. laws. The Portfolio intends to spread
its portfolio investments among the capital markets of a number
of countries and, under normal market conditions, will invest in
the equity securities of issuers based in at least four, and
normally considerably more, countries. There is no restriction,
however, on the percentage of the Portfolio's assets that may be
invested in countries within any one region of the world. To the
extent that the Portfolio's assets are invested within any one
region, the Portfolio may be subject to any special risks that
may be associated with that region.
NON-DIVERSIFIED STATUS. The Portfolio is a "non-
diversified" investment company, which means the Portfolio is not
limited in the proportion of its assets that may be invested in
the securities of a single issuer. However, the Portfolio
intends to conduct its operations so as to qualify to be taxed as
a "regulated investment company" for purposes of the Internal
Revenue Code, as amended, which will relieve the Portfolio of any
liability for federal income tax to the extent its earnings are
distributed to shareholders. See "Dividends, Distribution and
Taxes--United States Federal Income Taxes--General." To so
qualify, among other requirements, the Portfolio will limit its
investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the
Portfolio's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single
issuer and the Portfolio will not own more than 10% of the
outstanding voting securities of a single issuer. Investments in
U.S. Government Securities are not subject to these limitations.
Because the Portfolio, as a non-diversified investment company,
may invest in a smaller number of individual issuers than a
diversified investment company, an investment in the Portfolio
may, under certain circumstances, present greater risk to an
investor than an investment in a diversified investment company.
Securities issued or guaranteed by foreign governments
are not treated like U.S. Government Securities for purposes of
the diversification tests described in the preceding paragraph,
but instead are subject to these tests in the same manner as the
securities of non-governmental issuers.
INVESTMENTS IN LOWER-RATED DEBT SECURITIES. Debt
securities rated below investment grade, i.e., Ba and lower by
Moody's or BB and lower by S&P ("lower-rated securities"), or, if
not rated, determined by the Adviser to be of equivalent quality,
are subject to greater risk of loss of principal and interest
than higher-rated securities and are considered to be
predominantly speculative with respect to the issuer's capacity
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to pay interest and repay principal, which may in any case
decline during sustained periods of deteriorating economic
conditions or rising interest rates. They are also generally
considered to be subject to greater market risk than higher-rated
securities in times of deteriorating economic conditions. In
addition, lower-rated securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions
than investment grade securities, although the market values of
securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate
levels than do those of higher-rated securities. Debt securities
rated Ba by Moody's or BB by S&P are judged to have speculative
characteristics or to be predominantly speculative with respect
to the issuer's ability to pay interest and repay principal.
Debt securities rated B by Moody's and S&P are judged to have
highly speculative characteristics or to be predominantly
speculative. Such securities may have small assurance of
interest and principal payments. Debt securities having the
lowest ratings for non-subordinated debt instruments assigned by
Moody's or S&P (i.e., rated C by Moody's or CCC and lower by S&P)
are considered to have extremely poor prospects of ever attaining
any real investment standing, to have a current identifiable
vulnerability to default, to be unlikely to have the capacity to
pay interest and repay principal when due in the event of adverse
business, financial or economic conditions, and/or to be in
default or not current in the payment of interest or principal.
Ratings of fixed-income securities by Moody's and S&P
are a generally accepted barometer of credit risk. They are,
however, subject to certain limitations from an investor's
standpoint. the rating of a security is heavily weighted by past
developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating
is assigned and the time it is updated. In addition, there may
be varying degrees of difference in the credit risk of securities
within each rating category. See Appendix C for a description of
Moody's and S&P's bond and commercial paper ratings.
Adverse publicity and investor perceptions about lower-
rated securities, whether or not based on fundamental analysis,
may tend to decrease the market value and liquidity of such
lower-rated securities. The Adviser will try to reduce the risk
inherent in investment in lower-rated securities through credit
analysis, diversification and attention to current developments
and trends in interest rates and economic and political
conditions. However, there can be no assurance that losses will
not occur. Since the risk of default is higher for lower-rated
securities, the Adviser's research and credit analysis are a
correspondingly important aspect of its program for managing the
Portfolio's securities than would be the case if the Portfolio
did not invest in lower-rated securities. In considering
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investments for the Portfolio, the Adviser will attempt to
identify those high-risk, high-yield securities whose financial
condition is adequate to meet future obligations, has improved or
is expected to improve in the future. The Adviser's analysis
focuses on relative values based on such factors as interest or
dividend coverage, asset coverage earnings prospects, and the
experience and managerial strength of the issuer.
Non-rated securities will also be considered for
investment by the Portfolio when the Adviser believes that the
financial condition of the issuers of such securities, or the
protection afforded by the terms of the securities themselves,
limits the risk to the Portfolio to a degree comparable to that
of rated securities which are consistent with the Portfolio's
objective and policies.
INVESTMENT RESTRICTIONS
The following restrictions, which supplement those set
forth in the Portfolio's Prospectus, may not be changed without
approval by the vote of a majority of the Portfolio's outstanding
voting securities, which means the affirmative vote of the
holders of (i) 67% or more or the shares represented at a meeting
at which more than 50% of the outstanding shares are represented,
or (ii) more than 50% of the outstanding shares, whichever is
less. The Portfolio may not:
(1) Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; (ii) the lending of portfolio securities; or (iii) the
use of repurchase agreements;
(2) Participate on a joint or joint and several basis
in any securities trading account;
(3) Invest in companies for the purpose of exercising
control;
(4) Issue any senior security within the meaning of the
Act except that the Portfolio may write put and call options;
(5) Make short sales of securities or maintain a short
position, unless at all times when a short position is open it on
an equal amount of such securities or securities convertible into
or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in
amount to, the securities sold short ("short sales against the
box"), and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at
any one time (it is the Portfolio's present intention to make
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such sales only for the purpose of deferring realization of gain
or loss for Federal income tax purposes); or
(6)(i) Purchase or sell real estate, except that it may
purchase and sell securities of companies which deal in real
estate or interests therein; (ii) purchase or sell commodities or
commodity contracts including futures contracts (except foreign
currencies, foreign currency options and futures, options and
futures on securities and securities indices and forward
contracts or contracts for the future acquisition or delivery of
securities and foreign currencies and related options on futures
contracts and similar contracts); (iii) invest in interests in
oil, gas, or other mineral exploration or development programs;
(iv) purchase securities on margin, except for such short-term
credits as may be necessary for the clearance of transactions;
and (v) act as an underwriter of securities, except that the
Portfolio may acquire restricted securities under circumstances
in which, if such securities were sold, the Portfolio might be
deemed to be an underwriter for purposes of the Securities Act.
TECHNOLOGY PORTFOLIO
General
The primary investment objective of the Portfolio is to
emphasize growth of capital, and investments will be made based
upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital
growth. However, subject to the limitations referred to under
"Options" below, the Portfolio may seek to earn income through
the writing of listed call options. In seeking to achieve its
objective, the Portfolio will invest primarily in securities of
companies which are expected to benefit from technological
advances and improvements (i.e., companies which use technology
extensively in the development of new or improved products or
processes). The Portfolio will have at least 80% of its assets
invested in the securities of such companies except when the
Portfolio assumes a temporary defensive position. There
obviously can be no assurance that the Portfolio's investment
objective will be achieved, and the nature of the Portfolio's
investment objective and policies may involve a somewhat greater
degree of risk than would be present in a more conservative
investment approach.
Except as otherwise indicated, the investment policies
of the Portfolio are not "fundamental policies" and may,
therefore, be changed by the Board of Directors without a
shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. The Portfolio's investment objective, as well as
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the Portfolio's 80% investment policy described above, may not be
changed without shareholder approval.
The Portfolio expects under normal circumstances to have
substantially all of its assets invested in equity securities
(common stocks or securities convertible into common stocks or
rights or warrants to subscribe for or purchase common stocks).
When business or financial conditions warrant, the Portfolio may
take a defensive position and invest without limit in investment
grade debt securities or preferred stocks or hold its assets in
cash. The Portfolio at times may also invest in debt securities
and preferred stocks offering an opportunity for price
appreciation (e.g., convertible debt securities).
Critical factors which will be considered in the
selection of securities will include the economic and political
outlook, the value of individual securities relative to other
investment alternatives, trends in the determinants of corporate
profits, and management capability and practices. Generally
speaking, disposal of a security will be based upon factors such
as (i) actual or potential deterioration of the issuer's earning
power which the Portfolio believes may adversely affect the price
of its securities, (ii) increases in the price level of the
security or of securities generally which the Portfolio believes
are not fully warranted by the issuer's earning power, and (iii)
changes in the relative opportunities offered by various
securities.
Companies in which the Portfolio will invest include
those whose processes, products or services are anticipated by
Alliance Capital Management L.P., the Portfolio's investment
adviser (the "Investment Adviser"), to be significantly benefited
by the utilization or commercial application of scientific
discoveries or developments in such fields as, for example,
aerospace, aerodynamics, astrophysics, biochemistry, chemistry,
communications, computers, conservation, electricity, electronics
(including radio, television and other media), energy (including
development, production and service activities), geology, health
care, mechanical engineering, medicine, metallurgy, nuclear
physics, oceanography and plant physiology.
The Portfolio will endeavor to invest in companies where
the expected benefits to be derived from the utilization of
technology will significantly enhance the prospects of the
company as a whole (including, in the case of a conglomerate,
affiliated companies). The Portfolio's investment objective
permits the Portfolio to seek securities having potential for
capital appreciation in a variety of industries.
Certain of the companies in which the Portfolio invests
may allocate greater than usual amounts to research and product
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development. The securities of such companies may experience
above-average price movements associated with the perceived
prospects of success of the research and development programs. In
addition, companies in which the Portfolio invests could be
adversely affected by lack of commercial acceptance of a new
product or products or by technological change and obsolescence.
INVESTMENT POLICIES
OPTIONS. The Portfolio may write call options and may
purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. A call option written by the Portfolio
is "covered" if the Portfolio owns the underlying security
covered by the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or
for additional cash, U.S. Government Securities or other liquid
high grade debt obligation held in a segregated account by the
Fund's Custodian) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the
Portfolio holds a call on the same security and in the same
principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in
cash in a segregated account with the Fund's Custodian. The
premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the
remaining term of the option, supply and demand and interest
rates.
The writing of call options will, therefore, involve a
potential loss of opportunity to sell securities at high prices.
In exchange for the premium received by it, the writer of a fully
collateralized call option assumes the full downside risk of the
securities subject to such option. In addition, the writer of the
call gives up the gain possibility of the stock protecting the
call. Generally, the opportunity for profit from the writing of
options occurs when the stocks involved are lower priced or
volatile, or both. While an option that has been written is in
force, the maximum profit that may be derived from the optioned
stock is the premium less brokerage commissions and fees.
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It is the Portfolio's policy not to write a call option
if the premium to be received by the Portfolio in connection with
such options would not produce an annualized return of at least
15% of the then market value of the securities subject to the
option. Commissions, stock transfer taxes and other expenses of
the Portfolio must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio will ordinarily be sold
either on a national securities exchange or through put and call
dealers, most, if not all, of which are members of a national
securities exchange on which options are traded, and will in such
case be endorsed or guaranteed by a member of a national
securities exchange or qualified broker-dealer, which may be
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate
of the Adviser. The endorsing or guaranteeing firm requires that
the option writer (in this case the Portfolio) maintain a margin
account containing either corresponding stock or other equity as
required by the endorsing or guaranteeing firm.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's securities subject to outstanding call options
(valued at the lower of the option price or market value of such
securities) would exceed 15% of the Portfolio's total assets.
The Portfolio will not sell any call option if such sale would
result in more than 10% of the Portfolio's assets being committed
to call options written by the Portfolio which, at the time of
sale by the Portfolio, have a remaining term of more than 100
days.
OPTIONS ON MARKET INDICES. Options on securities
indices are similar to options on a security except that, rather
than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of
cash if the closing level of the chosen index is greater than (in
the case of a call) or less than (in the case of a put) the
exercise price of the option.
Through the purchase of listed index options, the
Portfolio could achieve many of the same objectives as through
the use of options on individual securities. Price movements in
the Portfolio's portfolio securities probably will not correlate
perfectly with movements in the level of the index and,
therefore, the Portfolio would bear a risk of loss on index
options purchased by it if favorable price movements of the
hedged portfolio securities do not equal or exceed losses on the
options or if adverse price movements of the hedged portfolio
securities are greater than gains realized from the options.
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RIGHTS AND WARRANTS. The Portfolio may invest up to 10%
of its total assets in rights and warrants which entitle the
holder to buy equity securities at a specific price for a
specific period of time. Rights and warrants may be considered
more speculative than certain other types of investments in that
they do not entitle a holder to dividends or voting rights with
respect to the securities which may be purchased nor do they
represent any rights in the assets of the issuing company. Also,
the value of a right or warrant does not necessarily change with
the value of the underlying securities and a right or warrant
ceases to have value if it is not exercised prior to the
expiration date.
FOREIGN INVESTMENTS. The Portfolio will not purchase a
foreign security if such purchase at the time thereof would cause
10% or more of the value of the Portfolios total assets to be
invested in foreign securities. Foreign issuers are subject to
accounting and financial standards and requirements that differ,
in some cases significantly, from those applicable to U.S.
issuers. In particular, the assets and profits appearing on the
financial statements of a foreign issuer may not reflect its
financial position or results of operations in the way they would
be reflected had the financial statement been prepared in
accordance with U.S. generally accepted accounting principles.
In addition, for an issuer that keeps accounting records in local
currency, inflation accounting rules in some of the countries in
which the Portfolio will invest require, for both tax and
accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation
accounting may indirectly generate losses or profits.
Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the
real condition of those issuers and securities markets.
Substantially less information is publicly available about
certain non-U.S. issuers than is available about U.S. issuers.
Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar
developments, such as military coups, have occurred in the past
in countries in which the Portfolio may invest and could
adversely affect the Portfolio's assets should these conditions
or events recur.
Foreign investment in certain foreign securities is
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain foreign securities and increase the costs and expenses of
the Portfolio. Certain countries in which the Portfolio may
invest require governmental approval prior to investments by
foreign persons, limit the amount of investment by foreign
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persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that
may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors.
ILLIQUID SECURITIES. The Portfolio will not maintain
more than 15% of its total assets (taken at market value) in
illiquid securities. For this purpose, illiquid securities
include, among others, (a) securities that are illiquid by virtue
of the absence of a readily available market or legal or
contractual restriction or resale, (b) options purchased by the
Portfolio over-the-counter and the cover for options written by
the Portfolio over-the-counter and (c) repurchase agreements not
terminable within seven days.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. The Adviser will
monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not
been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose
of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might
also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
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for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System
sponsored by the National Association of Securities Dealers,
Inc., an automated system for the trading, clearance and
settlement of unregistered securities of domestic and foreign
issuers.
LENDING OF PORTFOLIO SECURITIES. In order to increase
income, the Portfolio may from time to time lend its securities
to brokers, dealers and financial institutions and receive
collateral in the form of cash or U.S. Government Securities.
Under the Portfolio's procedures, collateral for such loans must
be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities (including
interest accrued on the loaned securities). The interest
accruing on the loaned securities will be paid to the Portfolio
and the Portfolio will have the right, on demand, to call back
the loaned securities. The Portfolio may pay fees to arrange the
loans. The Portfolio will not lend its securities in excess of
30% of the value of its total assets, nor will the Portfolio lend
its securities to any officer, director, employee or affiliate of
the Fund or the Adviser.
PORTFOLIO TURNOVER. The investment activities described
above are likely to result in the Portfolio engaging in a
considerable amount of trading of securities held for less than
one year. Accordingly, it can be expected that the Portfolio will
have a higher turnover rate than might be expected from
investment companies which invest substantially all of their
funds on a long-term basis. Correspondingly heavier brokerage
commission expenses can be expected to be borne by the Portfolio.
Management anticipates that the Portfolio's annual rate of
portfolio turnover will not be in excess of 100% in future years.
A 100% annual turnover rate would occur, for example, if all the
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stocks in the Portfolio's portfolio were replaced once in a
period of one year. The portfolio turnover rate for the fiscal
period ended December 31, 1996 was 22%.
Within this basic framework, the policy of the Portfolio
is to invest in any company and industry and in any type of
security which are believed to offer possibilities for capital
appreciation. Investments may be made in well-known and
established companies as well as in new and unseasoned companies.
Since securities fluctuate in value due to general economic
conditions, corporate earnings and many other factors, the shares
of the Portfolio will increase or decrease in value accordingly,
and there can be no assurance that the Portfolio will achieve its
investment goal or be successful.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
To maintain portfolio diversification and reduce
investment risk, as a matter of fundamental policy, the Portfolio
may not:
(i) with respect to 75% of its total assets, have
such assets represented by other than:
(a) cash and cash items, (b) securities issued
or guaranteed as to principal or interest by
the U.S. Government or its agencies or
instrumentalities, or (c) securities of any
one issuer (other than the U.S. Government and
its agencies or instrumentalities) not greater
in value than 5% of the Portfolio's total
assets, and not more than 10% of the
outstanding voting securities of such issuer;
(ii) purchase the securities of any one issuer,
other than the U.S. Government and its
agencies or instrumentalities, if immediately
after and as a result of such purchase (a) the
value of the holdings of the Portfolio in the
securities of such issuer exceeds 25% of the
value of the Portfolio's total assets, or
(b) the Portfolio owns more than 25% of the
outstanding securities of any one class of
securities of such issuer;
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(iii) concentrate its investments in any one
industry, but the Portfolio has reserved the
right to invest up to 25% of its total assets
in a particular industry;
(iv) invest in the securities of any issuer which
has a record of less than three years of
continuous operation (including the operation
of any predecessor) if such purchase at the
time thereof would cause 10% or more of the
value of the total assets of the Portfolio to
be invested in the securities of such issuer
or issuers;
(v) make short sales of securities or maintain a
short position or write put options;
(vi) mortgage, pledge or hypothecate or otherwise
encumber its assets, except as may be
necessary in connection with permissible
borrowings mentioned in investment restriction
(xiv) listed below;
(vii) purchase the securities of any other
investment company or investment trust, except
when such purchase is part of a merger,
consolidation or acquisition of assets;
(viii) purchase or sell real property (including
limited partnership interests but excluding
readily marketable interests in real estate
investment trusts or readily marketable
securities of companies which invest in real
estate) commodities or commodity contracts;
(ix) purchase participations or other direct
interests in oil, gas, or other mineral
exploration or development programs;
(x) participate on a joint or joint and several
basis in any securities trading account;
(xi) invest in companies for the purpose of
exercising control;
(xii) purchase securities on margin, but it may
obtain such short-term credits from banks as
may be necessary for the clearance of
purchases and sales of securities;
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(xiii) make loans of its assets to any other person,
which shall not be considered as including the
purchase of portion of an issue of publicly-
distributed debt securities; except that the
Portfolio may purchase non-publicly
distributed securities subject to the
limitations applicable to restricted or not
readily marketable securities and except for
the lending of portfolio securities as
discussed under "Other Investment Policies and
Techniques - Loans of Portfolio Securities" in
the Prospectus;
(xiv) borrow money except for the short-term credits
from banks referred to in paragraph (xii)
above and except for temporary or emergency
purposes and then only from banks and in an
aggregate amount not exceeding 5% of the value
of its total assets at the time any borrowing
is made. Money borrowed by the Portfolio will
be repaid before the Portfolio makes any
additional investments;
(xv) act as an underwriter of securities of other
issuers, except that the Portfolio may acquire
restricted or not readily marketable
securities under circumstances where, if sold,
the Portfolio might be deemed to be an
underwriter for purposes of the Securities Act
of 1933 (the Portfolio will not invest more
than 10% of its net assets in aggregate in
restricted securities and not readily
marketable securities); and
(xvi) purchase or retain the securities of any
issuer if, to the knowledge of the Portfolio's
management, those officers and directors of
the Portfolio, and those employees of the
Investment Adviser, who each owns beneficially
more than one-half of 1% of the outstanding
securities of such issuer together own more
than 5% of the securities of such issuer.
QUASAR PORTFOLIO
General
The investment objective of the Portfolio is growth of
capital by pursuing aggressive investment policies. Investments
will be made based upon their potential for capital appreciation.
Therefore, current income will be incidental to the objective of
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capital growth. Because of the market risks inherent in any
investment, the selection of securities on the basis of their
appreciation possibilities cannot ensure against possible loss in
value. Moreover, to the extent the Portfolio seeks to achieve its
objective through the more aggressive investment policies
described below, risk of loss increases. The Portfolio is
therefore not intended for investors whose principal objective is
assured income or preservation of capital.
Except as otherwise indicated, the investment policies
of the Portfolio are not "fundamental policies" and may,
therefore, be changed by the Board of Directors without a
shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. The Portfolio's investment objective, may not be
changed without shareholder approval.
Within this basic framework, the policy of the Portfolio
is to invest in any companies and industries and in any types of
securities which are believed to offer possibilities for capital
appreciation. Investments may be made in well-known and
established companies as well as in new and unseasoned companies.
Critical factors considered in the selection of securities
include the economic and political outlook, the values of
individual securities relative to other investment alternatives,
trends in the determinants of corporate profits, and management
capability and practices.
It is the policy of the Portfolio to invest principally
in equity securities (common stocks, securities convertible into
common stocks or rights or warrants to subscribe for or purchase
common stocks); however, it may also invest to a limited degree
in non-convertible bonds and preferred stocks when, in the
judgment of Alliance Capital Management L.P., the Portfolio's
adviser (the "Adviser"), such investments are warranted to
achieve the Fund's investment objective. When business or
financial conditions warrant, a more defensive position may be
assumed and the Portfolio may invest in short-term fixed-income
securities, in investment grade debt securities, in preferred
stocks or hold its assets in cash.
The Portfolio may invest in both listed and unlisted
domestic and foreign securities, in restricted securities, and in
other assets having no ready market, but not more than 15% of the
Portfolio's total assets may be invested in all such restricted
or not readily marketable assets at any one time. Restricted
securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration
statement is in effect under Rule 144 or 144A promulgated under
the Securities Act of 1933, as amended (the "Securities Act").
Where registration is required, the Portfolio may be obligated to
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pay all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under
an effective registration statement. If, during such a period
adverse market conditions were to develop, the Portfolio might
obtain a less favorable price than that which prevailed when it
decided to sell. Restricted securities and other not readily
marketable assets will be valued in such manner as the Board of
Directors of the Fund in good faith deems appropriate to reflect
their fair market value.
The Portfolio intends to invest in special situations
from time to time. A special situation arises when, in the
opinion of the Fund's management, the securities of a particular
company will, within a reasonably estimable period of time, be
accorded market recognition at an appreciated value solely by
reason of a development particularly or uniquely applicable to
that company and regardless of general business conditions or
movements of the market as a whole. Developments creating
special situations might include, among others, the following:
liquidations, reorganizations, recapitalizations or mergers,
material litigation, technological breakthroughs and new
management or management policies. Although large and well-known
companies may be involved, special situations often involve much
greater risk than is inherent in ordinary investment securities.
The Portfolio will not, however, purchase securities of any
company with a record of less than three years continuous
operation (including that of predecessors) if such purchase would
cause the Portfolio's investments in such companies, taken at
cost, to exceed 25% of the value of the Portfolio's total assets.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
The following additional investment policies supplement
those set forth above.
GENERAL. In seeking to attain its investment objective
of growth of capital, the Portfolio will supplement customary
investment practices by engaging in a broad range of investment
techniques including short sales "against the box," writing call
options, purchases and sales of put and call options written by
others and investing in special situations. These techniques are
speculative, may entail greater risk, may be considered of a more
short-term nature, and to the extent used, may result in greater
turnover of the Portfolio's portfolio and a greater expense than
is customary for most investment companies. Consequently, the
Portfolio is not a complete investment program and is not a
suitable investment for those who cannot afford to take such
risks or whose objective is income or preservation of capital.
No assurance can be given that the Portfolio will achieve its
investment objective. However, by buying shares in the Portfolio
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an investor may receive advantages he would not readily obtain as
an individual, including professional management and continuous
supervision of investments. The Portfolio will be subject to the
overall limitation (in addition to the specific restrictions
referred to below) that the aggregate value of all restricted and
not readily marketable securities of the Portfolio, and of all
cash and securities covering outstanding call options written or
guaranteed by the Portfolio, shall at no time exceed 15% of the
value of the total assets of the Portfolio.
There is also no assurance that the Portfolio will at
any particular time engage in all or any of the investment
activities in which it is authorized to engage. In the opinion
of the Portfolio's management, however, the power to engage in
such activities provides an opportunity which is deemed to be
desirable in order to achieve the Portfolio's investment
objective.
SHORT SALES. The Portfolio may only make short sales of
securities "against the box." A short sale is effected by selling
a security which the Portfolio does not own, or if the Portfolio
does own such security, it is not to be delivered upon
consummation of the sale. A short sale is "against the box" to
the extent that the Portfolio contemporaneously owns or has the
right to obtain securities identical to those sold short without
payment. Short sales may be used by the Portfolio to defer the
realization of gain or loss for Federal income tax purposes on
securities then owned by the Portfolio. Gains or losses will be
short- or long-term for Federal income tax purposes depending
upon the length of the period the securities are held by the
Portfolio before closing out the short sales by delivery to the
lender. The Portfolio may, in certain instances, realize short-
term gain on short sales "against the box" by covering the short
position through a subsequent purchase. Not more than 15% of the
value of the Portfolio's net assets will be in deposits on short
sales "against the box".
PUTS AND CALLS. The Portfolio may write call options
and may purchase and sell put and call options written by others,
combinations thereof, or similar options. The Portfolio may not
write put options. A put option gives the buyer of such option,
upon payment of a premium, the right to deliver a specified
number of shares of a stock to the writer of the option on or
before a fixed date at a predetermined price. A call option
gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified number of
shares of a specified stock on or before a fixed date, at a
predetermined price, usually the market price at the time the
contract is negotiated. When calls written by the Portfolio are
exercised, the Portfolio will be obligated to sell stocks below
the current market price.
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The writing of call options will, therefore, involve a
potential loss of opportunity to sell securities at higher
prices. In exchange for the premium received, the writer of a
fully collateralized call option assumes the full downside risk
of the securities subject to such option. In addition, the
writer of the call gives up the gain possibility of the stock
protecting the call. Generally, the opportunity for profit from
the writing of options is higher, and consequently the risks are
greater when the stocks involved are lower priced or volatile, or
both. While an option that has been written is in force, the
maximum profit that may be derived from the optioned stock is the
premium less brokerage commissions and fees. (For a discussion
regarding certain tax consequences of the writing of call options
by the Fund, see "Dividends, Distributions and Taxes".)
Writing, purchasing and selling call options are highly
specialized activities and entail greater than ordinary
investment risks. It is the Portfolio's policy not to write a
call option if the premium to be received by the Portfolio in
connection with such option would not produce an annualized
return of at least 15% of the then market value of the securities
subject to option. Commissions, stock transfer taxes and other
expenses of the Fund must be deducted from such premium receipts.
Option premiums vary widely depending primarily on supply and
demand. Calls written by the Portfolio will ordinarily be sold
either on a national securities exchange or through put and call
dealers, most, if not all, of whom are members of a national
securities exchange on which options are traded, and will in such
cases be endorsed or guaranteed by a member of a national
securities exchange or qualified broker-dealer, which may be
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), an
affiliate of the Adviser. The endorsing or guaranteeing firm
requires that the option writer (in this case the Portfolio)
maintain a margin account containing either corresponding stock
or other equity as required by the endorsing or guaranteeing
firm. A call written by the Portfolio will not be sold unless
the Portfolio at all times during the option period owns either
(a) the optioned securities, or securities convertible into or
carrying rights to acquire the optioned securities or (b) an
offsetting call option on the same securities.
The Portfolio will not sell a call option written or
guaranteed by it if, as a result of such sale, the aggregate of
the Portfolio's portfolio securities subject to outstanding call
options (valued at the lower of the option price or market value
of such securities) would exceed 15% of the Portfolio's total
assets. The Portfolio will not sell any call option if such sale
would result in more than 10% of the Portfolio's assets being
committed to call options written by the Portfolio, which, at the
time of sale by the Portfolio, have a remaining term of more than
100 days. The aggregate cost of all outstanding options
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purchased and held by the Portfolio shall at no time exceed 10%
of the Portfolio's total assets.
In buying a call, the Portfolio would be in a position
to realize a gain if, during the option period, the price of the
shares increased by an amount in excess of the premium paid and
commissions payable on exercise. It would realize a loss if the
price of the security declined or remained the same or did not
increase during the period by more than the amount of the premium
and commissions payable on exercise. By buying a put, the
Portfolio would be in a position to realize a gain if, during the
option period, the price of the shares declined by an amount in
excess of the premium paid and commissions payable on exercise.
It would realize a loss if the price of the security increased or
remained the same or did not decrease during that period by more
than the amount of the premium and commissions payable on
exercise. In addition, the Portfolio could realize a gain or
loss on such options by selling them.
As noted above, the Portfolio may purchase and sell put
and call options written by others, combinations thereof, or
similar options. There are markets for put and call options
written by others and the Portfolio may from time to time sell or
purchase such options in such markets. If an option is not so
sold and is permitted to expire without being exercised, its
premium would be lost by the Portfolio.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to purchase securities with
a view to holding them for periods of time sufficient to assure
long-term capital gains treatment upon their sale and not for
trading purposes. However, it is also the Portfolio's policy to
sell any security whenever, in the judgment of the Adviser, its
appreciation possibilities have been substantially realized or
the business or market prospects for such security have
deteriorated, irrespective of the length of time that such
security has been held. This policy may result in the Portfolio
realizing short-term capital gains or losses on the sale of
certain securities. See "Dividends, Distributions and Taxes". It
is anticipated that the Portfolio's rate of portfolio turnover
will not exceed 200% during the current fiscal year. A 200%
annual turnover rate would occur, for example, if all the stocks
in the Portfolio's portfolio were replaced twice within a period
of one year. A portfolio turnover rate approximating 200%
involves correspondingly greater brokerage commission expenses
than would a lower rate, which expenses must be borne by the
Portfolio and its shareholders. The portfolio turnover rate for
the fiscal period ended December 31, 1996 was 40%.
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INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
As a matter of fundamental policy, the Portfolio may
not:
(i) purchase the securities of any one
issuer, other than the U.S. Government or
any of its agencies or instrumentalities,
if immediately after such purchase more
than 5% of the value of its total assets
would be invested in such issuer or the
Portfolio would own more than 10% of the
outstanding voting securities of such
issuer, except that up to 25% of the
value of the Portfolio's total assets may
be invested without regard to such 5% and
10% limitations;
(ii) invest more than 25% of the value of its
total assets in any particular industry;
(iii) borrow money except for temporary or
emergency purposes in an amount not
exceeding 5% of its total assets at the
time the borrowing is made;
(iv) purchase or sell real estate;
(v) participate on a joint or joint and
several basis in any securities trading
account;
(vi) invest in companies for the purpose of
exercising control;
(vii) purchase or sell commodities or commodity
contracts;
(viii) except as permitted in connection with
short sales of securities "against the
box" described under the heading "Short
Sales" above, make short sales of
securities;
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(ix) make loans of its funds or assets to any
other person, which shall not be
considered as including the purchase of a
portion of an issue of publicly
distributed bonds, debentures, or other
securities, whether or not the purchase
was made upon the original issuance of
the securities; except that the Portfolio
may not purchase non-publicly distributed
securities subject to the limitations
applicable to restricted securities;
(x) except as permitted in connection with
short sales of securities or writing of
call options, described under the
headings "Short Sales" and "Puts and
Calls" above, pledge, mortgage or
hypothecate any of its assets;
(xi) except as permitted in connection with
short sales of securities "against the
box" described under the heading
"Additional Investment Policies and
Practices" above, make short sales of
securities; and
(xii) purchase securities on margin, but it may
obtain such short-term credits as may be
necessary for the clearance of purchases
and sales of securities.
REAL ESTATE INVESTMENT PORTFOLIO
GENERAL
The investment objective of the Portfolio is to seek a
total return on its assets from long-term growth of capital and
from income principally through investing in a portfolio of
equity securities of issuers that are primarily engaged in or
related to the real estate industry.
Except as otherwise indicated, the investment policies
of the Portfolio are not "fundamental policies" and may,
therefore, be changed by the Board of Directors without a
shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to its
shareholders. The Portfolio's investment objective may not be
changed without shareholder approval.
Under normal circumstances, at least 65% of the
Portfolio's total assets will be invested in equity securities of
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real estate investment trusts ("REITs") and other real estate
industry companies. A "real estate industry company" is a
company that derives at least 50% of its gross revenues or net
profits from the ownership, development, construction, financing,
management or sale of commercial, industrial or residential real
estate or interests therein. The equity securities in which the
Portfolio will invest for this purpose consist of common stock,
shares of beneficial interest of REITs and securities with common
stock characteristics, such as preferred stock or convertible
securities ("Real Estate Equity Securities").
The Portfolio may invest up to 35% of its total assets
in (a) securities that directly or indirectly represent
participations in, or are collateralized by and payable from,
mortgage loans secured by real property ("Mortgage-Backed
Securities"), such as mortgage pass-through certificates, real
estate mortgage investment conduit ("REMIC") certificates and
collateralized mortgage obligations ("CMOs") and (b) short-term
investments. These instruments are described below. The risks
associated with the Portfolio's transactions in REMICs, CMOs and
other types of mortgage-backed securities, which are considered
to be derivative securities, may include some or all of the
following: market risk, leverage and volatility risk, correlation
risk, credit risk and liquidity and valuation risk. See "Certain
Risk Considerations--Risk Factors Associated with the Real Estate
Industry" in the Prospectus for a description of these and other
risks.
As to any investment in Real Estate Equity Securities,
the analysis of the Adviser will focus on determining the degree
to which the company involved can achieve sustainable growth in
cash flow and dividend paying capability. The Adviser believes
that the primary determinant of this capability is the economic
viability of property markets in which the company operates and
that the secondary determinant of this capability is the ability
of management to add value through strategic focus and operating
expertise. The Portfolio will purchase Real Estate Equity
Securities when, in the judgment of the Adviser, their market
price does not adequately reflect this potential. In making this
determination, the Adviser will take into account fundamental
trends in underlying property markets as determined by
proprietary models, site visits conducted by individuals
knowledgeable in local real estate markets, price-earnings ratios
(as defined for real estate companies), cash flow growth and
stability, the relationship between asset value and market price
of the securities, dividend payment history, and such other
factors which the Adviser may determine from time to time to be
relevant. The Adviser will attempt to purchase for the Portfolio
Real Estate Equity Securities of companies whose underlying
portfolios are diversified geographically and by property type.
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The Portfolio may invest without limitation in shares of
REITs. REITs are pooled investment vehicles which invest
primarily in income producing real estate or real estate related
loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage
REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection
of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. Similar to
investment companies such as the Portfolio, REITs are not taxed
on income distributed to shareholders provided they comply with
several requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). The Portfolio will indirectly bear its
proportionate share of expenses incurred by REITs in which the
Portfolio invests in addition to the expenses incurred directly
by the Portfolio. The Portfolio may invest up to 5% of its
total assets in Real Estate Equity Securities of non-U.S.
issuers.
ADDITIONAL INVESTMENT POLICIES AND PRACTICES
To the extent not described in the Portfolio's
Prospectus, set forth below is additional information regarding
the Portfolio's investment policies and practices. Except as
otherwise noted, the Portfolio's investment policies are not
designated "fundamental policies" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act") and,
therefore, may be changed by the Directors of the Fund without a
shareholder vote. However, the Portfolio will not change its
investment policies without contemporaneous written notice to
shareholders.
CONVERTIBLE SECURITIES. The Portfolio may invest up to
15% of its net assets in convertible securities of issuers whose
common stocks are eligible for purchase by the Portfolio under
the investment policies described above. Convertible securities
include bonds, debentures, corporate notes and preferred stocks.
Convertible securities are instruments that are convertible at a
stated exchange rate into common stock. Prior to their
conversion, convertible securities have the same general
characteristics as non-convertible securities which provide a
stable stream of income with generally higher yields than those
of equity securities of the same or similar issuers. The market
value of convertible securities tends to decline as interest
rates increase and, conversely, to increase as interest rates
decline. While convertible securities generally offer lower
interest yields than non-convertible debt securities of similar
quality, they do enable the investor to benefit from increases in
the market price of the underlying common stock.
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When the market price of the common stock underlying a
convertible security increases, the price of the convertible
security increasingly reflects the value of the underlying common
stock and may rise accordingly. As the market price of the
underlying common stock declines, the convertible security tends
to trade increasingly on a yield basis, and thus may not
depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks in an
issuer's capital structure. They are consequently of higher
quality and entail less risk than the issuer's common stock,
although the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security
sells above its value as a fixed-income security.
FORWARD COMMITMENTS. No forward commitments will be
made by the Portfolio if, as a result, the Portfolio's aggregate
commitments under such transactions would be more than 30% of the
then current value of the Portfolio's total assets. The
Portfolio's right to receive or deliver a security under a
forward commitment may be sold prior to the settlement date, but
the Fund will enter into forward commitments only with the
intention of actually receiving or delivering the securities, as
the case may be. To facilitate such transactions, the Fund's
custodian will maintain, in a segregated account of the Fund,
cash and/or securities having value equal to, or greater than,
any commitments to purchase securities on a forward commitment
basis and, with respect to forward commitments to sell portfolio
securities of the Fund, the portfolio securities themselves. If
the Fund, however, chooses to dispose of the right to receive or
deliver a security subject to a forward commitment prior to the
settlement date of the transaction, it may incur a gain or loss.
In the event the other party to a forward commitment transaction
were to default, the Fund might lose the opportunity to invest
money at favorable rates or to dispose of securities at favorable
prices.
STANDBY COMMITMENT AGREEMENTS. The purchase of a
security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the
security can reasonably be expected to be issued and the value of
the security will thereafter be reflected in the calculation of
the Portfolio's net asset value. The cost basis of the security
will be adjusted by the amount of the commitment fee. In the
event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby
commitment. The Portfolio will at all times maintain a
segregated account with its custodian of cash and/or securities
in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
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There can be no assurance that the securities subject to
a standby commitment will be issued and the value of the
security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security
underlying the commitment is at the option of the issuer, the
Portfolio will bear the risk of capital loss in the event the
value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment
period if the issuer decides not to issue and sell the security
to the Portfolio.
REPURCHASE AGREEMENTS. The Portfolio may enter into
repurchase agreements pertaining to U.S. Government Securities
with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York)
in such securities. There is no percentage restriction on the
Portfolio's ability to enter into repurchase agreements.
Currently, the Portfolio intends to enter into repurchase
agreements only with its custodian and such primary dealers. A
repurchase agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon interest rate which is effective for the period of
time the buyer's money is invested in the security and which is
related to the current market rate rather than the coupon rate on
the purchased security. This results in a fixed rate of return
insulated from market fluctuations during such period. Such
agreements permit the Portfolio to keep all of its assets at work
while retaining "overnight" flexibility in pursuit of investments
of a longer-term nature. The Portfolio requires continual
maintenance by its Custodian for its account in the Federal
Reserve/Treasury Book Entry System of collateral in an amount
equal to, or in excess of, the resale price. In the event a
vendor defaulted on its repurchase obligation, the Portfolio
might suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. In the
event of a vendor's bankruptcy, the Portfolio might be delayed
in, or prevented from, selling the collateral for its benefit.
The Fund's Board of Directors has established procedures, which
are periodically reviewed by the Board, pursuant to which the
Adviser monitors the creditworthiness of the dealers with which
the Portfolio enters into repurchase agreement transactions.
SHORT SALES. When engaging in a short sale, in addition
to depositing collateral with a broker-dealer, the Portfolio is
currently required under the 1940 Act to establish a segregated
account with its custodian and to maintain therein cash or
securities in an amount that, when added to cash or securities
deposited with the broker-dealer, will at all times equal at
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least 100% of the current market value of the security sold
short.
ILLIQUID SECURITIES. Historically, illiquid securities
have included securities subject to contractual or legal
restrictions on resale because they have not been registered
under the Securities Act of 1933, as amended (the "Securities
Act"), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the
Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act, including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
The Portfolio may invest in restricted securities issued
under Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public
offering." Section 4(2) instruments are restricted in the sense
that they can only be resold through the issuing dealer to
institutional investors and in private transactions; they cannot
be resold to the general public without registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
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institutional buyers interested in purchasing certain restricted
securities held by the Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System, an
automated system for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers sponsored
by the National Association of Securities Dealers, Inc. The
Portfolio's investment in Rule 144A eligible securities are not
subject to the limitations described above on securities issued
under Section 4(2).
The Adviser, under the supervision of the Fund's Board
of Directors, will monitor the liquidity of restricted securities
in the Portfolio's portfolio. In reaching liquidity decisions,
the Adviser will consider, among other factors, the following:
(1) the frequency of trades and quotes for the security; (2) the
number of dealers making quotations to purchase or sell the
security; (3) the number of other potential purchasers of the
security; (4) the number of dealers undertaking to make a market
in the security; (5) the nature of the security (including its
unregistered nature) and the nature of the marketplace for the
security (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer);
and (6) any applicable Securities and Exchange Commission (the
"Commission") interpretation or position with respect to such
type of security.
DEFENSIVE POSITION. For temporary defensive purposes,
the Portfolio may vary from its investment objectives during
periods in which conditions in securities markets or other
economic or political conditions warrant. During such periods,
the Portfolio may increase without limit its position in short-
term, liquid, high-grade debt securities, which may include
securities issued by the U.S. government, its agencies and,
instrumentalities ("U.S. Government Securities"), bank deposit,
money market instruments, short-term (for this purpose,
securities with a remaining maturity of one year or less) debt
securities, including notes and bonds, and short-term foreign
currency denominated debt securities rated A or higher by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services ("S&P") Duff & Phelps Credit Rating Co. ("Duff &
Phelps") or Fitch Investors Service, Inc. ("Fitch") or, if not so
rated, of equivalent investment quality as determined by the
Adviser.
Subject to its policy of investing at least 65% of its
total assets in equity securities of real estate investment
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trusts and other real estate industry companies, the Portfolio
may also at any time temporarily invest funds awaiting
reinvestment or held as reserves for dividends and other
distributions to shareholders in money market instruments
referred to above.
PORTFOLIO TURNOVER. Generally, the Portfolio's policy
with respect to portfolio turnover is to purchase securities with
a view to holding them for periods of time sufficient to assure
that the Portfolio will realize less than 30% of its gross income
from the sale or other disposition of securities held for less
than three months (see "Dividends, Distributions and Taxes") and
to hold its securities for six months or longer. However, it is
also the Portfolio's policy to sell any security whenever, in the
judgment of the Adviser, its appreciation possibilities have been
substantially realized or the business or market prospects for
such security have deteriorated, irrespective of the length of
time that such security has been held. The Adviser anticipates
that the Portfolio's annual rate of portfolio turnover will not
exceed 100%. A 100% annual turnover rate would occur if all the
securities in the Portfolio's portfolio were replaced once within
a period of one year. The turnover rate has a direct effect on
the transaction costs to be borne by the Portfolio, and as
portfolio turnover increases it is more likely that the Portfolio
will realize short-term capital gains. In order to continue to
qualify as a regulated investment company for Federal tax
purposes, less than 30% of the annual gross income of the
Portfolio must be derived from the sale of securities held by the
Portfolio for less than three months. See "Dividends,
Distributions and Taxes."
INVESTMENT RESTRICTIONS
The following restrictions may not be changed without
approval of a majority of the outstanding voting securities of
the Portfolio, which means the vote of (i) 67% or more of the
shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares, whichever is less.
As a matter of fundamental policy, the Portfolio may
not:
(i) pledge, hypothecate, mortgage or
otherwise encumber its assets, except to
secure permitted borrowings;
(ii) make loans except through (a) the
purchase of debt obligations in
accordance with its investment objectives
and policies; (b) the lending of
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portfolio securities; or (c) the use of
repurchase agreements;
(iii) participate on a joint or joint and
several basis in any securities trading
account;
(iv) invest in companies for the purpose of
exercising control;
(v) issue any senior security within the
meaning of the 1940 Act;
(vi) make short sales of securities or
maintain a short position, unless at all
times when a short position is open not
more than 25% of the Portfolio's net
assets (taken at market value) is held as
collateral for such sales at any one
time;
(vii) (a) purchase or sell commodities or
commodity contracts including futures
contracts; (b) invest in interests in
oil, gas, or other mineral exploration or
development programs; (c) purchase
securities on margin, except for such
short-term credits as may be necessary
for the clearance of transactions; and
(d) act as an underwriter of securities,
except that the Portfolio may acquire
restricted securities under circumstances
in which, if such securities were sold,
the Portfolio might be deemed to be an
underwriter for purposes of the
Securities Act.
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. Each Portfolio, except the Total
Return Portfolio and the Technology Portfolio, may invest in
repurchase agreements pertaining to the types of securities in
which it invests. A repurchase agreement arises when a buyer
purchases a security and simultaneously agrees to resell it to
the vender at an agreed-upon future date, normally one day or a
few days later. The resale price is greater than the purchase
price, reflecting an agreed-upon market rate which is effective
for the period of time the buyer's money is invested in the
security and which is not related to the coupon rate on the
purchased security. Such agreements permit a Portfolio to keep
all of its assets at work while retaining "overnight" flexibility
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in pursuit of investments of a longer-term nature. Each
Portfolio requires continual maintenance of collateral held by
the Fund's Custodian in an amount equal to, or in excess of, the
market value of the securities which are the subject of the
agreement. In the event that a vendor defaulted on its
repurchase obligation, the Portfolio might suffer a loss to the
extent that the proceeds from the sale of the collateral were
less than the repurchase price. If the vendor became bankrupt,
the Portfolio might be delayed in, or prevented from, selling the
collateral. Repurchase agreements may be entered into with
member banks of the Federal Reserve System or "primary dealers"
(as designated by the Federal Reserve Bank of New York) in U.S.
Government securities. Repurchase agreements often are for short
periods such as one day or a week, but may be longer.
ILLIQUID SECURITIES. The following investment policy,
which is not fundamental and may be changed by the vote of the
Board of Directors, is applicable to each of the Fund's
Portfolios.
A Portfolio will not invest in illiquid securities if
immediately after such investment more than 10% or, in the case
of the North American Government Income Portfolio, Global Dollar
Government Portfolio, Utility Income Portfolio, Technology
Portfolio, Quasar Portfolio and the Real Estate Investment
Portfolio, 15%, of the Portfolio's total assets (taken at market
value) would be invested in such securities. For this purpose,
illiquid securities include, among others, (a) securities that
are illiquid by virtue of the absence of a readily available
market or legal or contractual restriction or resale, (b) options
purchased by the Portfolio over-the-counter and the cover for
options written by the Portfolio over-the-counter and (c)
repurchase agreements not terminable within seven days.
Securities that have legal or contractual restrictions
on resale but have a readily available market are not deemed
illiquid for purposes of this limitation. The Adviser will
monitor the liquidity of such restricted securities under the
supervision of the Board of Directors.
Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act,
securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the
Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and
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uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a
mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand
for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such
investments.
During the coming year, each Portfolio may invest up to
5% of its total assets in restricted securities issued under
Section 4(2) of the Securities Act, which exempts from
registration "transactions by an issuer not involving any public
offering." Section 4(2) instruments are restricted in the sense
that they can only be resold through the issuing dealer and only
to institutional investors; they cannot be resold to the general
public without registration.
Rule 144A under the Securities Act allows a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by a Portfolio, however, could affect adversely
the marketability of such portfolio securities and the Portfolio
might be unable to dispose of such securities promptly or at
reasonable prices. Rule 144A has already produced enhanced
liquidity for many restricted securities, and market liquidity
for such securities may continue to expand as a result of this
regulation and the consequent inception of the PORTAL System
sponsored by the National Association of Securities Dealers,
Inc., an automated system for the trading, clearance and
settlement of unregistered securities of domestic and foreign
issuers. The Portfolio's investments in Rule 144A eligible
securities are not subject to the limitations described above
under Section 4(2).
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The Adviser, acting under the supervision of the Board
of Directors, will monitor the liquidity of restricted securities
in each of the Fund's Portfolios that are eligible for resale
pursuant to Rule 144A. In reaching liquidity decisions, the
Adviser will consider, among others, the following factors:
(i) the frequency of trades and quotes for the security; (ii) the
number of dealers making quotations to purchase or sell the
security; (iii) the number of other potential purchasers of the
security; (iv) the number of dealers undertaking to make a market
in the security; (v) the nature of the security and the nature of
the marketplace for the security (e.g., the time needed to
dispose of the security, the method of soliciting offers and the
mechanics of the transfer); and (vi) any applicable Commission
interpretation or position with respect to such type of
securities.
FORWARD COMMITMENTS. The use of forward commitments
enables the Fund's Portfolios to protect against anticipated
changes in interest rates and prices. For instance, in periods
of rising interest rates and falling bond prices, the Portfolio
might sell securities in its portfolio on a forward commitment
basis to limit its exposure to falling prices. In periods of
falling interest rates and rising bond prices, the Portfolio
might sell a security in its portfolio and purchase the same or a
similar security on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields.
However, if the Adviser were to forecast incorrectly the
direction of interest rate movements, the Portfolio might be
required to complete such when-issued or forward transactions at
prices inferior to then current market values.
The Portfolio's right to receive or deliver a security
under a forward commitment may be sold prior to the settlement
date, but the Portfolio will enter into forward commitments only
with the intention of actually receiving or delivering the
securities, as the case may be. To facilitate such transactions,
the Portfolio's Custodian will maintain, in the separate account
of the Portfolio, cash or liquid high-grade Government Securities
having value equal to, or greater than, any commitments to
purchase securities on a forward commitment basis and, with
respect to forward commitments to sell portfolio securities of
the Portfolio, the portfolio securities themselves.
GENERAL. Whenever any investment policy or restriction
states a minimum or maximum percentage of a Portfolio's assets
which may be invested in any security or other asset, it is
intended that such minimum or maximum percentage limitation be
determined immediately after and as a result of the Portfolio's
acquisition of such security or other asset. Accordingly, any
later increase or decrease in percentage beyond the specified
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limitations resulting from a change in values or net assets will
not be considered a violation.
The Fund has voluntarily agreed that each Portfolio with
the ability to invest in foreign issuers will adhere to the
foreign security diversification guidelines promulgated by
certain State Insurance Departments. Pursuant to these
guidelines, each such Portfolio will invest in issuers from a
minimum of five different foreign countries. This minimum will
be reduced to four different foreign countries when foreign
securities comprise less than 80% of the Portfolio's net asset
value, three different foreign countries when foreign securities
comprise less than 60% of the Portfolio's net asset value, two
different foreign countries when foreign securities comprise less
than 40% of the Portfolio's net asset value and one foreign
country when foreign securities comprise less than 20% of the
Portfolio's net asset value. The Fund has also voluntarily
agreed that each Portfolio which may invest in foreign securities
will limit its investment in the securities of issuers located in
any one country to 20% of the Portfolio's net asset value, except
that the Portfolio may have an additional 15% of its net asset
value invested in securities of issuers located in Australia,
Canada, France, Japan, the United Kingdom or West Germany.
_________________________________________________________________
MANAGEMENT OF THE FUND
_________________________________________________________________
DIRECTORS AND OFFICERS
The Directors and principal officers of the Fund, their
ages and their primary occupations during the past five years are
set forth below. Each such Director and officer is also a
trustee, director or officer of other registered investment
companies sponsored by the Adviser. Unless otherwise specified,
the address of each such persons is 1345 Avenue of the Americas,
New York, New York 10105.
DIRECTORS
JOHN D. CARIFA,* 52, Chairman of the Board and
President, is the President, Chief Operating Officer and a
Director of Alliance Capital Management Corporation ("ACMC"),**
____________________
* An interested person of the Fund as defined in the 1940 Act.
** For purposes of this Statement of Additional Information,
ACMC refers to Alliance Capital Management Corporation, the
sole general partner of the Adviser, and the predecessor
(Footnote continued)
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the sole general partner of the Adviser, with which he has been
associated since prior to 1992.
RUTH BLOCK, 66, was formerly an Executive Vice President
and the Chief Insurance Officer of The Equitable Life Assurance
Society of the United States. She is a Director of Ecolab
Incorporated (specialty chemicals) and Amoco Corporation (oil and
gas). Her address is 75 Briar Woods Trail, Stamford, Connecticut
06903.
DAVID H. DIEVLER, 67, was formerly Chairman of the Board
and President of the Fund and a Senior Vice President of ACMC
with which he had been associated since prior to 1992 through
1994. He is currently an independent consultant. His address is
P.O. Box 167, Spring Lake, New Jersey 07762.
JOHN H. DOBKIN, 55, has been the President of Historic
Hudson Valley (historic preservation) since prior to 1992.
Previously, he was Director of the National Academy of Design.
From 1987 to 1992, he was a Director of ACMC. His address is 105
West 55th Street, New York, New York 10019.
WILLIAM H. FOULK, JR., 64, is an Investment Adviser and
an Independent Consultant. He was formerly Senior Manager of
Barrett Associates, Inc., a registered investment adviser, with
which he had been associated since prior to 1992. His address is
2 Hekma Road, Greenwich, Connecticut 06831.
DR. JAMES M. HESTER, 73, is President of the Harry Frank
Guggenheim Foundation and a Director of Union Carbide
Corporation, with which he has been associated since prior to
1992. He was formerly President of New York University, the New
York Botanical Garden and Rector of the United Nations
University. His address is 45 East 89th Street, New York, New
York 10128.
CLIFFORD L. MICHEL, 57, is a member of the law firm of
Cahill Gordon & Reindel with which he has been associated since
prior to 1992. He is President and Chief Executive Officer of
Wenonah Development Company (investments) and a Director of
Placer Dome, Inc. (mining). His address is St. Bernard's Road,
Gladstone, New Jersey 07934.
DONALD J. ROBINSON, 62, was formerly a partner at
Orrick, Herrington & Sutcliffe and is currently Senior Counsel to
that firm. He was also a Trustee of the Museum of the City of
____________________
(Footnote continued)
general partner of the Adviser, and the predecessor general
partner of the same name.
177
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New York from 1977-1995. His address is 98 Hell's Peak Road,
Weston, Vermont 05161.
OFFICERS
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT, 37, has been
a Senior Vice President of ACMC since July 1993. Previously, she
held various responsibilities as head of Equitable Capital
Management Corporation's Fixed Income Management Department,
Private Placement Secondary Trading and Fund Management since
prior to 1992.
ALFRED L. HARRISON, SENIOR VICE PRESIDENT, 59, is a Vice
Chairman of ACMC with which he has been associated since prior to
1992.
NELSON R. JANTZEN, SENIOR VICE PRESIDENT, 52 is a Senior
Vice President of ACMC with which he has been associated since
prior to 1992.
WAYNE D. LYSKI, SENIOR VICE PRESIDENT, 55, is an
Executive Vice President of ACMC with which he has been
associated with since prior to 1992.
ALDEN M. STEWART, SENIOR VICE PRESIDENT, 51, is an
Executive Vice President of ACMC since July 1993. Previously, he
was associated with ECMC since prior to 1992.
EDMUND P. BERGAN, JR., SECRETARY, 46, is a Senior Vice
President and General Counsel of Alliance Fund Distributors, Inc.
("AFD") with which he has been associated since prior to 1992.
MARK D. GERSTEN, TREASURER AND CHIEF FINANCIAL OFFICER,
46, is a Senior Vice President of Alliance Fund Services, Inc.
("AFS") with which he has been associated since prior to 1992.
ANDREW GANGOLF, ASSISTANT SECRETARY, 42, has been a Vice
President and Assistant General Counsel of AFD since December
1994. Prior thereto he was a Vice President and Assistant
Secretary of Delaware Management Company, Inc. since October 1992
and a Vice President and Counsel to Equitable Life Assurance
Society of the United States since prior to 1992.
THOMAS R. MANLEY, CONTROLLER, 45, has been a Vice
President of ACMC since July 1993. Previously he was associated
with ECMC since 1992.
STEVEN J. LIPMAN, 32, ASSISTANT CONTROLLER, is a manager
of ACMC since 1994. Previously, he was associated with C&S
Planning Corp. since prior to 1992.
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VINCENT S. NOTO, 32, ASSISTANT CONTROLLER, is an
Assistant Vice President of AFS with which he has been associated
since prior to 1992.
JUAN J. RODRIGUEZ, 39, ASSISTANT CONTROLLER, is an
Assistant Vice President of AFS with which he has been associated
since prior to 1992.
STEVEN YU, ASSISTANT CONTROLLER, 37, has been an
Assistant Vice President of ACMC since 1993. Previously he was
associated with ECMC since prior to 1992.
The Fund does not pay any fees to, or reimburse expenses
of, its Directors who are considered "interested persons" of the
Fund. The aggregate compensation paid by the Fund to each of the
Directors during its fiscal year ended December 31, 1996 and the
aggregate compensation paid to each of the Directors during
calendar year 1996 by all of the registered investment companies
to which the Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex") and the total number
of registered investment companies in the Alliance Fund Complex
with respect to which each of the Directors served as a director
or trustee, are set forth below. Neither the Fund nor any other
fund in the Alliance Fund Complex provides compensation in the
form of pension or retirement benefits to any of its directors or
trustees.
Total Number
of Funds in
the Alliance
Total Complex,
Compensation Including the
from the Fund, as to
Alliance Fund which the
Aggregate Complex, Director is a
Name of Director Compensation Including the Director or
of the Fund from the Fund Fund* Trustee
_______________ _____________ _____________ _____________
John D. Carifa $-0- $-0- 50
Ruth Block $3,094 $157,500 37
David H. Dievler $3,094 $182,000 43
John H. Dobkin $3,238 $121,250 30
William H. Foulk,
Jr. $3,238 $144,250 32
Dr. James M. Hester $3,094 $148,500 37
Clifford L. Michel $2,863 $146,068 36
Donald J. Robinson $ 962 $137,250 38
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___________________________
* The information in this column represents amounts
actually paid during calendar year 1996.
As of March 31, 1997 the Directors and officers of the Fund as a
group owned less than 1% of the shares of the Fund.
ADVISER
Alliance Capital Management L.P., a New York Stock
Exchange listed company with principal offices at 1345 Avenue of
the Americas, New York, New York 10105, has been retained under
an advisory agreement (the "Advisory Agreement") to provide
investment advice and, in general, to conduct the management and
investment program of the Fund under the supervision and control
of the Fund's Board of Directors.
The Adviser is a leading international investment
manager supervising client accounts with assets as of December
31, 1996 of more than $182 billion (of which more than $63
billion represented the assets of investment companies). The
Adviser's clients are primarily major corporate employee benefit
funds, public employee retirement systems, investment companies,
foundations and endowment funds and included, as of December 31,
1996, 34 of the FORTUNE 100 Companies. As of that date, the
Adviser and its subsidiaries employed approximately 1,450
employees who operated out of domestic offices and the overseas
offices of subsidiaries in Bombay, Istanbul, London, Paris, Sao
Paolo, Sydney, Tokyo, Toronto, Bahrain, Luxembourg and Singapore.
The 52 registered investment companies comprising 110 separate
investment portfolios managed by the Adviser currently have more
than two million shareholders.
Alliance Capital Management Corporation, the sole
general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly-owned subsidiary
of The Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
United States and a wholly-owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company. As of June 30, 1996,
ACMC, Inc. and Equitable Capital Management Corporation, each a
wholly-owned direct or indirect subsidiary of Equitable, together
with Equitable, owned in the aggregate approximately 57% of the
issued and outstanding units representing assignments of
beneficial ownership of limited partnership interests in the
Adviser ("Units"). As of June 30, 1996, approximately 33% and
10% of the Units were owned by the public and employees of the
Adviser and its subsidiaries, respectively, including employees
of the Adviser who serve as Directors of the Fund.
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<PAGE>
As of September 6, 1996, AXA and its subsidiaries own
approximately 60.7% of the issued and outstanding shares of
capital stock of ECI. AXA is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations include activities in life
insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically with activities
in France, the United States, Australia, the United Kingdom,
Canada and other countries, principally in Europe and the
Asia/Pacific area. AXA is also engaged in asset management,
investment banking, securities trading, brokerage, real estate
and other financial services activities in the United States,
Europe and the Asia/Pacific area. Based on information provided
by AXA, as of September 9, 1996, 36.3% of the issued ordinary
shares (representing 49.1% of the voting power) of AXA were owned
directly or indirectly by Finaxa, a French holding company
("Finaxa"). As of September 6, 1996, 61.3% of the voting shares
(representing 73.5% of the voting power) of Finaxa were owned by
five French mutual insurance companies (the "Mutuelles AXA") (one
of which, AXA Assurances I.A.R.D. Mutuelle, owned 34.8% of the
voting shares representing 40.6% of the voting power), and 23.7%
of the voting shares of Finaxa (representing 10.5% of the voting
power) of Finaxa were owned by Banque Paribas, a French bank.
Including the ordinary shares directly or indirectly owned by
Finaxa, the Mutuelles AXA directly or indirectly owned 42.0% of
the issued ordinary shares (representing 56.8% of the voting
power) of AXA as of September 9, 1996. Acting as a group, the
Mutuelles AXA control AXA and Finaxa. In addition, as of
September 9, 1996, 7.8% of the issued ordinary shares of the AXA
without the power to vote were owned by subsidiaries of AXA.
The Investment Advisory Agreement became effective on
July 22, 1992. The Investment Advisory Agreement was approved by
the unanimous vote, cast in person, of the Fund's Directors
including the Directors who are not parties to the Investment
Advisory Agreement or "interested persons" as defined in the Act,
of any such party, at a meeting called for the purpose and held
on September 10, 1991. At a meeting held on June 11, 1992, a
majority of the outstanding voting securities of the Fund
approved the Investment Advisory Agreement. The Investment
Advisory Agreement was amended as of June 2, 1994 to provide for
the addition of the North American Government Income Portfolio,
the Global Dollar Government Portfolio and the Utility Income
Portfolio. The amendment to the Investment Advisory Agreement
was approved by the unanimous vote, cast in person, of the
disinterested Directors at a meeting called for that purpose and
held on December 7, 1993. The Investment Advisory Agreement was
amended as of October 24, 1994 to provide for the addition of the
Growth Portfolio, Worldwide Privatization Portfolio, Conservative
Investors Portfolio and Growth Investors Portfolio. The
amendment to the Investment Advisory Agreement was approved by
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<PAGE>
the unanimous vote, cast in person of the disinterested Directors
at a meeting called for that purpose and held on June 14, 1994.
The Investment Advisory Agreement was amended as of February 1,
1996 to provide for the addition of the Technology Portfolio.
The amendment to the Investment Advisory Agreement was approved
by the unanimous vote, cast in person, of the disinterested
Directors at a meeting called for that purpose and held on
November 28, 1995. The Investment Advisory Agreement was amended
as of July 22, 1996 to provide for the addition of the Quasar
Porfolio. The amendment to the Investment Advisory Agreement was
approved by the unanimous vote, cast in person, of the
disinterested Directors at a meeting called for that purpose and
held on June 4, 1996. The Investment Advisory Agreement was
amended as of December 31, 1996 to provide for the addition of
the Real Estate Investment Portfolio. The amendment to the
Investment Advisory Agreement was approved by the unanimous vote,
cast in person, of the disinterested Directors at a meeting
called for that purpose and held on September 10, 1996.
The Adviser provides investment advisory services and
order placement facilities for each of the Fund's Portfolios and
pays all compensation of Directors and officers of the Fund who
are affiliated persons of the Adviser. The Adviser or its
affiliates also furnish the Fund, without charge, management
supervision and assistance and office facilities and provide
persons satisfactory to the Fund's Board of Directors to serve as
the Fund's officers. Each of the Portfolios pays the Adviser at
the following annual percentage rate of its average daily net
asset value:
Money Market Portfolio .500%
Premier Growth Portfolio 1.000%
Growth and Income Portfolio .625%
U.S. Government/High-Grade
Securities Portfolio .600%
High-Yield Portfolio .750%
Total Return Portfolio .625%
International Portfolio 1.000%
Short-Term Multi-Market Portfolio .550%
Global Bond Portfolio .650%
North American Government
Income Portfolio .650%
Global Dollar Government
Portfolio .750%
Utility Income Portfolio .750%
Conservative Investors
Portfolio .750%
Growth Investors Portfolio .750%
Growth Portfolio .750%
Worldwide Privatization
Portfolio 1.000%
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<PAGE>
Technology Portfolio 1.000%
Quasar Portfolio 1.000%
Real Estate Investment Portfolio .900%
For the fiscal years ended December 31, 1994, December
31, 1995 and December 31, 1996, the advisory fee paid by the
Money Market Portfolio to the Adviser was $-0-, $62,062 and
$250,603, respectively; for the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996, the advisory fees
paid by the Premier Growth Portfolio to the Adviser were
$128,361, $434,845, and $449,415, respectively; for the fiscal
years ended December 31, 1994, December 31, 1995 and December 31,
1996, the advisory fees paid to the Adviser by the Growth and
Income Portfolio were $200,454, $362,532, and $504,313,
respectively; for each of the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996, the advisory fee
paid by the U.S. Government/High Grade Securities Portfolio to
the Adviser was $-0-, $-0- and $132,023, respectively; for each
of the fiscal years ended December 31, 1994, December 31, 1995
and December 31, 1996, the advisory fee paid by the Total Return
Portfolio to the Adviser was $-0-, $-0- and $78,063,
respectively; for each of the fiscal years ended December 31,
1994, December 31, 1995 and December 31, 1996, the advisory fee
paid by the International Portfolio to the Adviser was $-0-, $-0-
and $12,587, respectively; for the fiscal years ended December
31, 1994, December 31, 1995 and December 31, 1996, the advisory
fees paid by the Short-Term Multi Market Portfolio to the Adviser
were $127,682, $32,003 and $-0-, respectively; for each of the
fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the advisory fee paid by the Global Bond
Portfolio to the Adviser was $-0-, $-0- and $66,976,
respectively; for the period May 3, 1994 (commencement of
operations) through December 31, 1994 and the fiscal years ended
December 31, 1995, and December 31, 1996, the advisory fee paid
by the North American Government Income Portfolio to the Advisor
was $-0-, $- 0- and $21,264, respectively; for the period May 2,
1994 (commencement of operations) through December 31, 1994 and
for the fiscal years ended December 31, 1995, and December 31,
1996, the advisory fee paid by the Global Dollar Government
Portfolio to the Adviser was $-0-, respectively; for the period
May 10, 1994 (commencement of operations) through December 31,
1994 and for the fiscal years ended December 31, 1995, and
December 31, 1996, the advisory fee paid by the Utility Income
Portfolio to the Advisor was $-0-, $-0- and $21,431,
respectively; for the period October 28, 1994 (commencement of
operations) through December 31, 1994 and for the fiscal years
ended December 31, 1995 and December 31, 1996, the advisory fee
paid by the Conservative Investors Portfolio to the Adviser was
$-0-, $-0- and $46,778, respectively; for the period October 28,
1994 (commencement of operations) through December 31, 1994 and
for the fiscal years ended December 31, 1995 and December 31,
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<PAGE>
1996, the advisory fee paid by the Growth Investors Portfolio to
the Adviser was $-0-, respectively; for the period September 15,
1994 (commencement of operations) through December 31, 1994 and
for the fiscal years ended December 31, 1995 and December 31,
1996, the advisory fees paid by the Growth Portfolio to the
Adviser were $-0-, $89,502, and $656,813, respectively; for the
period September 23, 1994 (commencement of operations) through
December 31, 1994 and for the fiscal years ended December 31,
1995 and December 31, 1996, the advisory fee paid by the
Worldwide Privatization Portfolio to the Advisor was $-0-, $-0-
and $11,158, respectively; for the period January 11, 1996
(commencement of operations) through December 31, 1996, the
advisory fee paid by the Technology Portfolio to the Advisor was
$40,218 and for the period August 5, 1996 (commencement of
operations) through December 31, 1996, the advisory fee paid by
the Quasar Portfolio to the Advisor was $-0-.
Certain other clients of the Adviser may have investment
objectives and policies similar to those of the Fund. The Adviser
may, from time to time, make recommendations which result in the
purchase or sale of the particular security by its other clients
simultaneously with the Fund. If transactions on behalf of more
than one client during the same period increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price. It is the policy
of the Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the
Adviser to the accounts involved, including the Fund. When two
or more of the clients of the Adviser (including the Fund) are
purchasing or selling the same security on a given day from the
same broker or dealer, such transactions may be averaged as to
price.
As to the obtaining of services other than those
specifically provided to the Fund by the Adviser, the Fund may
employ its own personnel. For such services, it also may utilize
personnel employed by the Adviser or by other subsidiaries of
Equitable. In such event, the services will be provided to the
Fund at cost and the payments specifically approved by the Fund's
Board of Directors.
The Investment Advisory Agreement is terminable with
respect to any Portfolio without penalty on 60 days' written
notice by a vote of a majority of the outstanding voting
securities of such Portfolio or by a vote of a majority of the
Fund's Directors, or by the Adviser on 60 days' written notice,
and will automatically terminate in the event of its assignment.
The Investment Advisory Agreement provides that in the absence of
willful misfeasance, bad faith or gross negligence on the part of
the Adviser, or of reckless disregard of its obligations
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<PAGE>
thereunder, the Adviser shall not be liable for any action or
failure to act in accordance with its duties thereunder.
The Investment Advisory Agreement continues in effect
until each December 31, and thereafter for successive twelve
month periods computed from each January 1, provided that such
continuance is specifically approved at least annually by a vote
of a majority of the Fund's outstanding voting securities or by
the Fund's Board of Directors, including in either case approval
by a majority of the Directors who are not parties to the
Investment Advisory Agreement or interested persons of such
parties as defined by the 1940 Act.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is investment adviser to ACM Institutional Reserves, Inc.,
AFD Exchange Reserves, The Alliance Fund, Inc., Alliance All-Asia
Investment Fund, Inc., Alliance Balanced Shares, Inc., Alliance
Bond Fund, Inc., Alliance Capital Reserves, Alliance Developing
Markets Fund, Inc., Alliance Global Dollar Government Fund, Inc.,
Alliance Global Small Cap Fund, Inc., Alliance Global Strategic
Income Trust, Inc., Alliance Government Reserves, Alliance Growth
and Income Fund, Inc., Alliance Income Builder Fund, Inc.,
Alliance International Fund, Alliance Limited Maturity Government
Fund, Inc., Alliance Money Market Fund, Alliance Mortgage
Securities Income Fund, Inc., Alliance Multi-Market Strategy
Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance
Municipal Income Fund II, Inc., Alliance Municipal Trust,
Alliance New Europe Fund, Inc., Alliance North American
Government Income Trust, Inc., Alliance Premier Growth Fund,
Inc., Alliance Quasar Fund, Inc., Alliance Real Estate Investment
Fund, Inc., Alliance/Regent Sector Opportunity Fund, Inc.,
Alliance Short-Term Multi-Market Trust, Inc., Alliance Technology
Fund, Inc., Alliance Utility Income Fund, Inc., Alliance World
Income Trust, Inc., Alliance Worldwide Privatization Fund, The
Alliance Portfolios, Fiduciary Management Associates and The
Hudson River Trust, all registered open-end investment companies;
ACM Government Income Fund, Inc., ACM Government Securities Fund,
Inc., ACM Government Spectrum Fund, Inc., ACM Government
Opportunity Fund, Inc., ACM Managed Dollar Income Fund, Inc., ACM
Managed Income Fund, Inc., ACM Municipal Securities Income Fund,
Inc., Alliance All-Market Advantage Fund, Inc., Alliance Global
Environment Fund, Inc., Alliance World Dollar Government Fund,
Inc., Alliance World Dollar Government Fund II, Inc., The Austria
Fund, Inc., The Korean Investment Fund, Inc., The Southern Africa
Fund, Inc. and The Spain Fund, Inc., all registered closed-end
investment companies.
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<PAGE>
SUB-ADVISER TO THE GLOBAL BOND PORTFOLIO
The Adviser has retained under a sub-advisory agreement
(the "Sub-Advisory Agreement") a sub-adviser, AIGAM International
Limited (the "Sub-Adviser"), an indirect, majority owned
subsidiary of American International Group, Inc., a major
international financial service company, to provide research and
management services to the Global Bond Portfolio. The
Sub-Adviser may, from time to time, direct transactions for its
investment accounts which result in the purchase or sale of a
particular security by its investment accounts simultaneously
with the recommendation by the Sub-Adviser to the Global Bond
Portfolio to purchase or sell such security. If transactions on
behalf of such investment accounts increase the demand for
securities being purchased or the supply of securities being
sold, there may be an adverse effect on price for the Portfolio.
In 1994 the Sub-Advisor changed its name from Dempsey & Company
International Limited, which was founded in 1988. For its
services as Sub-Adviser to the Global Bond Portfolio, the
Sub-Adviser receives from the Adviser a monthly fee at the annual
rate of .40 of 1% of the Portfolio's average daily net asset
value. The fee is accrued daily and payable in arrears for
services performed during each calendar month within fifteen days
following the end of such month.
For the fiscal years ended December 31, 1994, 1995 and
1996, the Sub-Adviser received sub-advisory fees in the amounts
of $27,175, $36,383 and $59,958, respectively, from the Adviser.
The Sub-Advisory Agreement is terminable without penalty
on 60 days' written notice to the Sub-Adviser by a vote of the
holders of a majority of the Global Bond Portfolio's outstanding
voting securities or by the Directors or by the Adviser, or by
the Sub-Adviser on 60 days' written notice to the Adviser and the
Portfolio, and will automatically terminate in the event of its
assignment or of the assignment of the Investment Advisory
Agreement. The Sub-Advisory Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on
the part of the Sub-Adviser, or reckless disregard of the Sub-
Adviser's obligations thereunder, the Sub-Adviser shall not be
liable for any action or failure to act in accordance with its
duties thereunder.
The Sub-Advisory Agreement became effective on July 22,
1992. At a meeting held on June 11, 1992, a majority of the
outstanding voting securities of the Portfolio approved the Sub-
Advisory Agreement.
The Sub-Advisory Agreement provides that it shall remain
in effect from year to year provided that such continuance is
specifically approved at least annually by the Board of Directors
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<PAGE>
of the Fund, or by vote of a majority of the outstanding voting
securities of the Global Bond Portfolio, and, in either case, by
a majority of the Directors who are not parties to the Investment
Advisory Agreement or Sub-Advisory Agreement or interested
persons as defined by the 1940 Act.
In providing advisory services to the Fund and other
clients investing in real estate securities, Alliance has access
to the research services of Koll Investment Management the
Investment Management Division of Koll ("Koll"), which acts as a
consultant to Alliance with respect to the real estate market.
As a consultant, Koll provides to Alliance, at Alliance's
expense, such in-depth information regarding the real estate
market, the factors influencing regional valuations and analysis
of recent transactions in office, retail, industrial and
multi-family properties as Alliance shall from time to time
request. Koll will not furnish investment advice or make
recommendations regarding the purchase or sale of securities by
the Fund nor will it be responsible for making investment
decisions involving Fund assets.
Koll is one of the largest fee-based property management
firms in the United States as well as one of the largest
publishers of real estate research, with approximately 2,600
employees nationwide. Koll will provide Alliance with exclusive
access to its REIT-Score model which ranks approximately 115
REITs based on the relative attractiveness of the property
markets in which they own real estate. This model scores the
approximately 9,000 individual properties owned by these
companies. REIT-Score is in turn based on Koll's National Real
Estate Index which gathers, analyzes and publishes targeted
research data for the 65 largest U.S. real estate markets based
on a variety of public- and private-sector sources as well as
Koll's proprietary database of 45,000 commercial property
transactions representing over $250 billion of investment
property and over 2,000 tracked properties which report rent and
expense data quarterly. Koll has previously provided access to
its REIT-Score model results primarily to the institutional
market through subscriptions. The model is no longer provided to
any research publications and the Fund is currently the only
mutual fund available to retail investors that has access to
Koll's REIT-Score model.
_________________________________________________________________
PURCHASE AND REDEMPTION OF SHARES
_________________________________________________________________
The following information supplements that set forth in
the Fund's Prospectus under the heading "Purchase and Redemption
of Shares."
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REDEMPTION OF SHARES
The value of a shareholder's shares on redemption or
repurchase may be more or less than the cost of such shares to
the shareholder, depending upon the market value of the
Portfolio's securities at the time of such redemption or
repurchase. Payment either in cash or in portfolio securities
received by a shareholder upon redemption or repurchase of his
shares, assuming the shares constitute capital assets in his
hands, will result in long-term or short-term capital gains (or
loss) depending upon the shareholder's holding period and basis
in respect of the shares redeemed.
_________________________________________________________________
NET ASSET VALUE
_________________________________________________________________
The net asset value of shares of any of the Fund's
Portfolios on which the subscription and redemption prices are
based is computed in accordance with the Articles of
Incorporation and By-Laws of the Fund at the next close of
regular trading on the New York Stock Exchange (the "Exchange")
(currently 4:00 p.m. Eastern time) following receipt of a
purchase or redemption order by the Fund, on each Fund business
day on which such an order is received and trading in the types
of securities in which a Portfolio invests might materially
affect the value of such Portfolio's shares, by dividing the
value of the Portfolio's assets less its liabilities, by the
total number of shares then outstanding. For this purpose, a
Fund business day is any weekday exclusive of days on which the
New York Stock Exchange is closed (most national holidays and
Good Friday).
Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued
at the mean between the most recently quoted bid and asked prices
provided by the principal market makers. Any security for which
the primary market is on an exchange is valued at the last sale
price on such exchange on the day of valuation or, if there was
no sale on such day, the last bid price quoted on such day.
Options will be valued at market value or fair market value if no
market exists. Futures contracts will be valued in a like
manner, except that open futures contracts sales will be valued
using the closing settlement price or, in the absence of such a
price, the most recently quoted asked price. Securities and
assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund. However,
readily marketable fixed-income securities may be valued on the
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<PAGE>
basis of prices provided by a pricing service when such prices
are believed by the Adviser to reflect the fair market value of
such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of
securities and any developments related to specific securities.
U.S. Government Securities and other debt instruments having 60
days or less remaining until maturity are stated at amortized
cost if their original maturity was 60 days or less, or by
amortizing their fair value as of the 61st day prior to maturity
if their original term to maturity exceeded 60 days (unless in
either case the Fund's Board of Directors determines that this
method does not represent fair value). The Money Market
Portfolio uses amortized cost for all of its portfolio
securities. All other assets of the Fund, including restricted
and not readily marketable securities, are valued in such manner
as the Board of Directors of the Fund in good faith deems
appropriate to reflect their fair market value.
Trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally
completed well before the close of business of each business day
in New York. In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore,
trading takes place in Japanese markets on certain Saturdays and
in various foreign markets on days which are not business days in
New York and on which the Fund's net asset value is not
calculated. Events affecting the values of portfolio securities
that occur between the time their prices are determined and the
close of the New York Stock Exchange will not be reflected in the
Portfolio's calculation of net asset value unless the Board of
Directors of the Fund deems that the particular event would
materially affect net asset value, in which case an adjustment
will be made.
For purposes of determining the net asset value per
share of the International Portfolio, the Short-Term Multi-Market
Portfolio, the North American Government Income Portfolio and the
Utility Income Portfolio, all assets and liabilities initially
expressed in foreign currencies will be converted into United
States dollars at the mean of the bid and asked prices of such
currencies against the United States dollar last quoted by a
major bank which is a regular participant in the institutional
foreign exchange markets or on the basis of a pricing service
which takes into account the quotes provided by a number of such
major banks.
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_________________________________________________________________
PORTFOLIO TRANSACTIONS
_________________________________________________________________
Neither the Fund nor the Adviser has entered into
agreements or understandings with any brokers or dealers
regarding the placement of securities transactions because of
research or statistical services they provide. To the extent
that such persons or firms supply investment information to the
Adviser for use in rendering investment advice to the Fund, such
information may be supplied at no cost to the Adviser and,
therefore, may have the effect of reducing the expenses of the
Adviser in rendering advice to the Fund. While it is impossible
to place an actual dollar value on such investment information,
its receipt by the Adviser probably does not reduce the overall
expenses of the Adviser to any material extent.
The investment information provided to the Adviser is of
the types described in Section 28(e)(3) of the Securities
Exchange Act of 1934 and is designed to augment the Adviser's own
internal research and investment strategy capabilities. Research
and statistical services furnished by brokers through which the
Fund effects securities transactions are used by the Adviser in
carrying out its investment management responsibilities with
respect to all its client accounts but not all such services may
be utilized by the Adviser in connection with the Fund.
The Fund will deal in some instances in equity
securities which are not listed on a national stock exchange but
are traded in the over-the-counter market. In addition, most
transactions for the U.S. Government/High-Grade Securities
Portfolio and the Money Market Portfolio are executed in the
over-the-counter market. Where transactions are executed in the
over-the-counter market, the Fund will seek to deal with the
primary market makers, but when necessary in order to obtain the
best price and execution, it will utilize the services of others.
In all cases, the Fund will attempt to negotiate best execution.
The Fund may from time to time place orders for the
purchase or sale of securities (including listed call options)
with Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
an affiliate of the Adviser, the Fund's distributor, and with
brokers which may have their transactions cleared or settled, or
both, by the Pershing Division of DLJ for which DLJ may receive a
portion of the brokerage commission. With respect to orders
placed with DLJ for execution on a national securities exchange,
commissions received must conform to Section 17(e)(2)(A) of the
1940 Act and Rule 17e-1 thereunder, which permit an affiliated
person of a registered investment company (such as the Fund), or
any affiliated person of such person, to receive a brokerage
190
<PAGE>
commission from such registered investment company provided that
such commission is reasonable and fair compared to the
commissions received by other brokers in connection with
comparable transactions involving similar securities during a
comparable period of time.
Brokerage commissions paid for the period ended
December 31, 1994 on securities transactions amounted to $54,827,
$102,852, $28,278, $1,043, $3,214, $10,634, $105 and $175 with
respect to the Premier Growth Portfolio, the Growth and Income
Portfolio, the International Portfolio, the Total Return
Portfolio, the Utility Income Portfolio, the Growth Portfolio,
the Conservative Investors Portfolio and the Growth Investors
Portfolio, respectively. Brokerage commissions paid for the
fiscal year ended December 31, 1995 on securities transactions
amounted to $1,373, $3,055, $104,323, $229,432, $64,196,
$148,418, $7,479, $22,347 and $11,055 with respect to the
Conservative Investors Portfolio, the Growth Investors Portfolio,
the Growth Portfolio, the Growth and Income Portfolio, the
International Portfolio, the Premier Growth Portfolio, the Total
Return Portfolio, the Utility Portfolio and the Worldwide
Privatization Portfolio, respectively. The Global Bond
Portfolio, the Global Dollar Government Portfolio, the Money
Market Portfolio, the North American Government Income, the
Short-Term Multi-Market Portfolio and the U.S. Government/High
Grade Securities Portfolio did not incur any brokerage
commissions for the fiscal year ended December 31, 1995.
Brokerage commission paid for the fiscal year ended December 31,
1996 on securities transactions amounted to $90,253, $255,607,
$260,435, $30,275, $31,907,$287,449, $41,894, $23,162, $28,063,
$10,847 and $12,207 with respect to the Premier Growth Portfolio,
the Growth and Income Portfolio, the International Portfolio, the
Total Return Portfolio, the Utility Income Portfolio, the Growth
Portfolio, the Worldwide Privatization Portfolio, the
Conservative Investors Portfolio, the Growth Investors Portfolio,
the Technology Portfolio and the Quasar Portfolio, respectively.
The Global Bond Portfolio, the Short-Term Multi-Market Portfolio,
the U.S. Government/High Grade Securities Portfolio, the Money
Market Portfolio, the Global Dollar Government Portfolio, and the
North American Government Income Portfolio did not incur and
brokerage commission for the fiscal year ended December 31, 1996.
During the fiscal years ended December 31, 1994, 1995 and 1996,
no brokerage commissions were paid to Donaldson, Lufkin &
Jenrette Securities Corporation and no brokerage commissions were
paid to brokers utilizing the Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation.
191
<PAGE>
_________________________________________________________________
DIVIDENDS, DISTRIBUTIONS AND TAXES
_________________________________________________________________
Each Portfolio of the Fund qualified and intends to
continue to qualify to be taxed as a "regulated investment
company" under the Internal Revenue Code of 1986 (the "Code").
If so qualified, each Portfolio will not be subject to federal
income and excise taxes on its investment company taxable income
and net capital gains to the extent such investment company
taxable income and net capital gains are distributed to the
separate accounts of insurance companies which hold its shares.
Under current tax law, capital gains or dividends from any
Portfolio are not currently taxable when left to accumulate
within a variable annuity or variable life insurance contract.
Distributions of net investment income and net short-term capital
gains will be treated as ordinary income and distributions of net
long-term capital gains will be treated as long-term capital gain
in the hands of the insurance companies.
Investment income received by a Portfolio from sources
within foreign countries may be subject to foreign income taxes
withheld at the source. If more than 50% of the value of the
Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations (which
for this purpose should include obligations issued by foreign
governments), the Portfolio will be eligible to file an election
with the Internal Revenue Service to pass through to its
shareholders the amount of foreign taxes paid by the Portfolio.
If eligible, each such Portfolio intends to file such an
election, although there can be no assurance that such Portfolio
will be able to do so.
Section 817(h) of the Code requires that the investments
of a segregated asset account of an insurance company be
"adequately diversified", in accordance with Treasury Regulations
promulgated thereunder, in order for the holders of the variable
annuity contracts or variable life insurance policies underlying
the account to receive the tax-deferred or tax-free treatment
generally afforded holders of annuities or life insurance
policies under the Code. The Department of the Treasury has
issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account
will treat investments in a regulated investment company for
purposes of the applicable diversification requirements. Under
the Regulations, if a regulated investment company satisfies
certain conditions, a segregated asset account owning shares of
the regulated investment company will not be treated as a single
investment for these purposes, but rather the account will be
treated as owning its proportionate share of each of the assets
192
<PAGE>
of the regulated investment company. Each Portfolio plans to
satisfy these conditions at all times so that the shares of such
Portfolio owned by a segregated asset account of a life insurance
company will be subject to this treatment under the Code.
For information concerning the federal income tax
consequences for the holders of variable annuity contracts and
variable rate insurance policies, such holders should consult the
prospectus used in connection with the issuance of their
particular contracts or policies.
_________________________________________________________________
GENERAL INFORMATION
_________________________________________________________________
CAPITALIZATION
The Fund's shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they choose to do so, and in such election of
Directors will not be able to elect any person or persons to the
Board of Directors.
All shares of the Fund when duly issued will be fully
paid and nonassessable. The Board of Directors is authorized to
reclassify and issue any unissued shares to any number of
additional series without shareholder approval. Accordingly, the
Board of Directors in the future, for reasons such as the desire
to establish one or more additional Portfolios with different
investment objectives, policies or restrictions, may create
additional series of shares. Any issuance of shares of such
additional series would be governed by the 1940 Act and the law
of the State of Maryland.
If shares of another series were issued in connection
with the creation of the new portfolio, each share of any of the
Fund's Portfolios would normally be entitled to one vote for all
purposes. Generally, shares of each Portfolio would vote as a
single series for the election of directors and on any other
matter that affected each portfolios in substantially the same
manner. As to matters affecting each Portfolio differently, such
as approval of the Investment Advisory Agreement and changes in
investment policy, shares of each Portfolio would vote as
separate series.
Procedures for calling shareholders meeting for the
removal of Directors of the Fund, similar to those set forth in
Section 16(c) of the 1940 Act, are available to shareholder of
193
<PAGE>
the Fund. Meetings of shareholders may be called by 10% of the
Fund's outstanding shareholders.
The outstanding voting shares of each outstanding
Portfolio of the Fund as of March 31, 1997 consisted of
72,715,684 shares of common stock of the Money Market Portfolio,
11,402,331 shares of common stock of the Premier Growth
Portfolio, 8,896,965 shares of common stock of the Growth and
Income Portfolio, 2,635,483 shares of common stock of the U.S.
Government/High Grade Securities Portfolio, 3,253,539 shares of
common stock of the International Portfolio, 1,891,775 shares of
common stock of the Total Return Portfolio, 687,221 shares of
common stock of the Short-Term Multi-Market Portfolio, 1,556,432
shares of common stock of the Global Bond Portfolio, 1,709,939
shares of common stock of the North American Government Income
Portfolio, 726,440 shares of common stock of the Global Dollar
Government Portfolio, 1,230,862 shares of common stock the
Utility Income Portfolio, 1,907,213 shares of common stock of the
Conservative Investors Portfolio, 866,370 shares of common stock
of the Growth Investors Portfolio, 8,763,067 shares of common
stock of the Growth Portfolio, 1,864,326 shares of common stock
of the Worldwide Privatization Portfolio, 3,543,493 shares of
common stock of the Technology Portfolio, 1,934,248 shares of
common stock of the Quasar Portfolio and 232,684 shares of common
stock of the Real Estate Investment Portfolio. Set forth and
discussed below is certain information as to all persons who
owned of record or beneficially 5% of more of the outstanding
shares of the Fund's Portfolios at March 31, 1997.
NUMBER OF % OF
PORTFOLIO NAME AND ADDRESS SHARES SHARES
Money Market AIG Life Insurance 50,934,887 70%
Company ("AIG")
One ALICO Plaza
600 N. King Street
Wilmington, DE 19801
American International 10,683,332 15%
Life Assurance Company
of New York ("American")
80 Pine Street
New York, NY 10005
Fortis Financial Group 9,487,284 13%
P.O. Box 64284
St. Paul, MN 55164
Premier Growth AIG 5,172,192 45%
American 1,280,061 11%
194
<PAGE>
Merrill Lynch Life 4,215,978 37%
Insurance Company
800 Scudders Mill Road
Plainsboro, NJ 08536
Growth and Income AIG 6,178,416 69%
American 1,686,779 19%
U.S. Government/ AIG 1,892,861 72%
High Grade
American 542,175 21%
American Skandia 198,623 7%
Life Assurance Corp.
("Skandia")
1 Corporate Drive
Shelton, CT 06484
Total Return AIG 1,177,820 62%
Skandia 289,401 15%
American 422,663 22%
International AIG 2,511,874 77%
American 488,172 15%
Skandia 232,840 7%
Short-Term American 79,942 12%
Multi-Market
AIG 501,034 73%
Reliastar/Bankers
Security Insurance 61,160 8%
Company
20 Washington Avenue S.
Minneapolis, MN 55401
Global Bond American 151,643 10%
AIG 651,594 42%
National Union Fire 692,366 45%
195
<PAGE>
Insurance Co.
c/o American
Attn: Bill Tucker
80 Pine Street
New York, NY 10005
North American AIG 1,334,051 78%
Government Income
American 344,977 20%
Global Dollar AIG 575,808 79%
Government
Skandia 54,529 8%
American 96,101 13%
Utility Income AIG 821,643 67%
American 345,724 28%
Skandia 63,493 5%
Conservative AIG 1,180,166 62%
Investors
American 615,336 32%
Growth Investors AIG 600,877 69%
American 145,213 17%
Skandia 81,032 9%
Growth AIG 6,650,619 76%
American 1,605,858 18%
Worldwide AIG 1,478,851 79%
Privatization
American 291,760 15%
Skandia 93,712 5%
Technology AIG 2,951,253 83%
American 515,944 15%
Quasar AIG 1,605,696 83%
American 261,054 14%
196
<PAGE>
Real Estate AIG 199,103 85%
American 32,458 14%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, acts as Custodian for the
securities and cash of the Fund but plays no part in deciding the
purchase or sale of portfolio securities.
PRINCIPAL UNDERWRITER
Alliance Fund Distributors, Inc., 1345 Avenue of the
Americas, New York, New York 10105, serves as the Fund's
Principal Underwriter, and as such may solicit orders from the
public to purchase shares of the Fund. Under the Distribution
Services Agreement between the Fund and the Principal
Underwriter, the Fund has agreed to indemnify the distributor, in
the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder,
against certain civil liabilities, including liabilities under
the Securities Act.
COUNSEL
Legal matters in connection with the issuance of the
shares of the Fund offered hereby will be passed upon by Seward &
Kissel, New York, New York.
INDEPENDENT AUDITORS
Ernst & Young LLP, New York, New York, have been
appointed as independent auditors for the Fund.
SHAREHOLDER APPROVAL
The capitalized term "Shareholder Approval" as used in
this Statement of Additional Information means (1) the vote of
67% or more of the shares of that Portfolio represented at a
meeting at which more than 50% of the outstanding shares are
represented or (2) more than 50% of the outstanding shares of
that Portfolio, whichever is less.
YIELD AND TOTAL RETURN QUOTATIONS
From time to time a Portfolio of the Fund states its
"yield", "actual distribution rate" and "total return." A
Portfolio's yield for any 30-day (or one-month) period is
computed by dividing the net investment income per share earned
during such period by the maximum public offering price per share
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<PAGE>
on the last day of the period, and then annualizing such 30-day
(or one-month) yield in accordance with a formula prescribed by
the Commission which provides for compounding on a semi-annual
basis. The Portfolio's "actual distribution rate," which may be
advertised in items of sales literature, is computed in the same
manner as yield except that actual income dividends declared per
share during the period in question are substituted for net
investment income per share. Advertisements of a Portfolio's
total return disclose the Portfolio's average annual compounded
total return for the period since the Portfolio's inception. The
Portfolio's total return for each such period is computed by
finding, through the use of a formula prescribed by the
Commission, the average annual compounded rate of return over the
period that would equate an assumed initial amount invested to
the value of such investment at the end of the period. For
purposes of computing total return, income dividends and capital
gains distributions paid on shares of the Portfolio are assumed
to have been reinvested when received and the maximum sales
charge applicable to purchases of Portfolio shares is assumed to
have been paid. The past performance of each Portfolio is not
intended to indicate future performance.
The Money Market Portfolio's yield for the seven days
ended December 31, 1996 was 4.82%. The U.S. Government/High
Grade Securities Portfolio's yield for the month ended
December 31, 1996 was 6.2%. The Short-Term Multi-Market
Portfolio's yield for the month ended December 31, 1996 was 6.7%.
The Global Bond Portfolio's yield for the month ended
December 31, 1996 was 5.3%. The North American Government Income
Portfolio's yield for the month ended December 31, 1996 was 9.5%.
The Global Dollar Government Portfolio's yield for the month
ended December 31, 1996 was 7.6%. The actual distribution rate
for such period for the Money Market Portfolio was .41%, for the
U.S. Government/High Grade Security Portfolio was 0%, for the
Short-Term Multi-Market Portfolio was 0%, for the Global Bond
Portfolio was 0%, for the North American Government Income
Portfolio was 0% and for the Global Dollar Government Portfolio
was 0%.
The Money Market Portfolio's average annual total
returns for the period December 30, 1992 (commencement of
operations) through December 31, 1996 and for the fiscal year
ended December 31, 1996 were 3.8% and 4.71%, respectively. The
Premier Growth Portfolio's average annual total returns for the
period June 26, 1992 (commencement of operations) through
December 31, 1996 and for the fiscal year ended December 31, 1996
were 19.18% and 22.70%, respectively. The Growth and Income
Portfolio's average annual total returns for the period
January 14, 1991 (commencement of operations) through December
31, 1996, for the five years ended December 31, 1996 and for the
fiscal year ended December 31, 1996 were 13.18%, 15.14% and
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<PAGE>
24.09%, respectively. The U.S. Government/High Grade Securities
Portfolio's average annual total returns for the period September
17, 1992 (commencement of operations) through December 31, 1996
and for the fiscal year ended December 31, 1996 were 5.68% and
2.55%, respectively. The Total Return Portfolio's average annual
total returns for the period December 28, 1992 (commencement of
operations) through December 31, 1996 and for the fiscal year
ended December 31, 1996 were 10.71% and 15.17%, respectively.
The International Portfolio's average annual total returns for
the period December 28, 1992 (commencement of operations) through
December 31, 1996 and for the fiscal year ended December 31, 1996
were 11.16% and 7.25%, respectively. The Short-Term Multi-Market
Portfolio's average annual total returns for the period
November 28, 1990 (commencement of operations) through December
31, 1996, for the five years ended December 31, 1996 and for the
fiscal year ended December 31, 1996 were 3.90%, 3.29% and 9.57%,
respectively. The Global Bond Portfolio's average annual total
returns for the period July 15, 1991 (commencement of operations)
through December 31, 1996, for the five years ended December 31,
1996 and for the fiscal year ended December 31, 1996 were 9.29%,
7.93% and 6.21%, respectively. The North American Government
Income Portfolio's average annual total return for the period
May 3, 1994 (commencement of operations) through December 31,
1996 and for the fiscal year ended December 31, 1996 were
9.70% and 18.70%, respectively. The Global Dollar Government
Portfolio's average annual total return for the period May 2,
1994 (commencement of operations) through December 31, 1996 and
for the fiscal year ended December 31, 1996 were 16.73% and
24.90%, respectively. The Utility Income Portfolio's average
annual total return for the period May 10, 1994 (commencement of
operations) through December 31, 1996 and for the fiscal year
ended December 31, 1996 were 10.56% and 7.88%, respectively. The
Conservative Investors Portfolio's average annual total return
for the period October 28, 1994 (commencement of operations)
through December 31, 1996 and for the fiscal year ended December
31, 1996 were 9.66% and 3.79%, respectively. The Growth
Investors Portfolio's average annual total return for the period
October 28, 1994 (commencement of operations) through December
31, 1996 and for the fiscal year ended December 31, 1996 were
12.19% and 8.18%, respectively. The Growth Portfolio's average
annual total return for the period September 15, 1994
(commencement of operations) through December 31, 1996 and for
the fiscal year ended December 31, 1996 were 30.04% and 28.49%,
respectively. The Worldwide Privatization Portfolio's average
annual total return for the period September 23, 1994
(commencement of operations) through December 31, 1996 and for
the fiscal year ended December 31, 1996 were 13.21% and 18.51%,
respectively. The Technology Portfolio's average annual total
return for the period January 11, 1996 (commencement of
operations) through December 31, 1996 was 10.40%. The Quasar
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<PAGE>
Portfolio's average annual total return for the period August 5,
1996 through December 31, 1996 was 6.40%.
200
<PAGE>
<PAGE>
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--97.0%
BASIC INDUSTRIES--0.6%
CHEMICALS--0.6%
Dow Chemical Co........................... 6,800 $ 532,950
------------
CAPITAL GOODS--2.5%
ELECTRICAL EQUIPMENT--1.5%
General Electric Co....................... 15,100 1,493,012
------------
MACHINERY--1.0%
Case Corp................................. 9,600 523,200
Deere & Co................................ 9,900 402,188
------------
925,388
------------
2,418,400
------------
CONSUMER
MANUFACTURING--2.2%
AUTO & RELATED--2.2%
Chrysler Corp............................. 35,800 1,181,400
General Motors Corp....................... 17,700 986,775
------------
2,168,175
------------
CONSUMER SERVICES--19.8%
AIRLINES--5.9%
AMR Corp.*................................ 5,000 440,625
Delta Air Lines, Inc...................... 6,400 453,600
KLM Royal Dutch Airlines.................. 18,776 523,381
Northwest Airlines Corp. Cl.A*............ 46,060 1,802,097
UAL Corp.*................................ 40,400 2,525,000
------------
5,744,703
------------
BROADCASTING &
CABLE--4.1%
AirTouch Communications, Inc.*............ 77,500 1,956,875
Cox Communications, Inc. Cl.A*............ 40,100 927,312
Liberty Media Group Cl.A*................. 8,625 246,352
TCI Group Series A*....................... 63,500 829,469
------------
3,960,008
------------
ENTERTAINMENT &
LEISURE--2.5%
ITT Corp.*................................ 8,740 379,098
Walt Disney Co............................ 28,900 2,012,162
------------
2,391,260
------------
RESTAURANTS &
LODGING--2.4%
Marriot International, Inc................ 12,600 696,150
McDonald's Corp........................... 35,300 1,597,325
------------
2,293,475
------------
RETAILING--4.9%
Home Depot, Inc........................... 37,133 $ 1,861,292
Kohls Corp.*.............................. 22,700 890,975
Sears, Roebuck & Co....................... 28,200 1,300,725
Wal-Mart Stores, Inc...................... 30,600 699,975
------------
4,752,967
------------
19,142,413
------------
CONSUMER STAPLES--10.8%
COSMETICS--0.8%
Gillette Co............................... 9,800 761,950
------------
FOOD--3.5%
Campbell Soup Co.......................... 19,800 1,588,950
PepsiCo, Inc.............................. 62,600 1,831,050
------------
3,420,000
------------
TOBACCO--6.5%
Philip Morris Cos., Inc................... 55,200 6,216,900
------------
10,398,850
------------
<PAGE>
ENERGY--0.9%
DOMESTIC INTEGRATED--0.5%
Exxon Corp................................ 2,100 205,800
Texaco, Inc............................... 2,600 255,125
------------
460,925
------------
INTERNATIONAL--0.2%
British Petroleum Co. Plc................. 1,500 212,063
------------
OIL & GAS SERVICES--0.2%
Baker Hughes, Inc......................... 3,000 103,500
Schlumberger Ltd.......................... 1,400 139,825
------------
243,325
------------
916,313
------------
FINANCE--19.1%
BANKING & CREDIT--9.9%
Citicorp.................................. 9,100 937,300
First Bank System, Inc.................... 6,400 436,800
First Union Corp.......................... 7,700 569,800
Household International, Inc.............. 13,700 1,263,825
MBNA Corp................................. 72,400 3,004,600
NationsBank Corp.......................... 7,100 694,025
Norwest Corp.............................. 61,100 2,657,850
------------
9,564,200
------------
BROKERAGE & MONEY
MANAGEMENT--4.0%
Green Tree Financial Corp................. 6,800 262,650
Merrill Lynch & Co., Inc.................. 31,100 2,534,650
Morgan Stanley Group, Inc................. 18,400 1,051,100
------------
3,848,400
------------
B-1
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
PREMIER GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
INSURANCE--2.1%
American International Group, Inc......... 11,900 $ 1,288,175
General Reinsurance Corp.................. 3,400 536,350
Progressive Corp.......................... 3,000 202,125
------------
2,026,650
------------
MORTGAGE BANKING--3.1%
Federal National Mortgage Association..... 80,500 2,998,625
------------
18,437,875
------------
HEALTH CARE--13.4%
DRUGS--7.3%
Amgen, Inc.*.............................. 33,000 1,796,438
Merck & Co., Inc.......................... 39,600 3,138,300
Pfizer, Inc............................... 25,300 2,096,737
------------
7,031,475
------------
MEDICAL PRODUCTS--1.8%
Johnson & Johnson......................... 15,400 766,150
Medtronic, Inc............................ 13,500 918,000
------------
1,684,150
------------
MEDICAL SERVICES--4.3%
Columbia/HCA Healthcare Corp.............. 72,100 2,938,075
Oxford Health Plans, Inc.*................ 10,200 597,337
United Healthcare Corp.................... 14,400 648,000
------------
4,183,412
------------
12,899,037
------------
TECHNOLOGY--26.7%
AEROSPACE & DEFENSE--1.4%
Boeing Co................................. 12,600 1,340,325
------------
COMMUNICATIONS
EQUIPMENT--1.2%
Ericsson (L.M.) Telephone Co.............. 11,990 361,948
Lucent Technologies, Inc.................. 16,321 754,846
------------
1,116,794
------------
COMPUTER HARDWARE--6.3%
Compaq Computer Corp.*.................... 38,200 2,836,350
Dell Computer Corp.*...................... 19,800 1,053,113
Hewlett-Packard Co........................ 43,700 2,195,925
------------
6,085,388
------------
<PAGE>
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
COMPUTER SOFTWARE &
SERVICES--4.7%
Electronic Data Systems Corp. ............ 16,800 $ 726,600
First Data Corp........................... 21,200 773,800
Microsoft Corp.*.......................... 21,800 1,802,587
Netscape Communications Corp.*............ 12,000 682,500
Oracle Corp.*............................. 12,500 521,094
------------
4,506,581
------------
NETWORK SOFTWARE--5.4%
3Com Corp.*............................... 19,700 1,444,256
Ascend Communications, Inc.*.............. 5,100 316,838
Cascade Communications Corp.*............. 6,600 364,650
Cisco Systems, Inc.*...................... 49,000 3,120,687
------------
5,246,431
------------
SEMI-CONDUCTORS &
RELATED--7.7%
Applied Materials, Inc.*.................. 11,300 406,094
Intel Corp. ............................. 13,100 1,715,281
warrants, expiring 3/14/98*........... 57,400 5,305,913
------------
7,427,288
------------
25,722,807
------------
TRANSPORTATION--1.0%
RAILROADS--1.0%
Burlington Northern Santa Fe.............. 10,900 941,487
------------
Total Common Stocks and
Other Investments
(cost $76,134,815)..................... 93,578,307
------------
SHORT-TERM INVESTMENTS--2.6%
COMMERCIAL PAPER--2.6%
General Electric Capital Corp.
7.00%, 1/02/97
(amortized cost $2,477,518)............ $ 2,478 2,477,518
------------
TOTAL INVESTMENTS--99.6%
(cost $78,612,333)..................... 96,055,825
Other assets less liabilities--0.4%....... 378,483
------------
NET ASSETS--100.0%........................ $ 96,434,308
============
- -------------------------------------------------------------------------------
* Non-income producing security.
See Notes to Financial Statements.
B-2
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GLOBAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
AUSTRALIA--4.3%
GOVERNMENT/AGENCY--4.3%
Queensland Treasury
8.00%, 5/14/03 (a)
(cost $718,722)................ AU$ 950 $ 782,008
------------
AUSTRIA--1.1%
GOVERNMENT/AGENCY--1.1%
Republic of Austria
5.00%, 1/22/01
(cost $212,726)................ JPY 20,000 196,442
------------
BELGIUM--4.1%
GOVERNMENT/AGENCY--4.1%
Kingdom of Belgium
6.25%, 10/06/03
(cost $767,222)................ DEM 1,100 745,224
------------
CANADA--4.4%
GOVERNMENT/AGENCY--4.4%
Government of Canada
7.50%, 12/01/03
(cost $784,533)................ CA$ 1,000 789,834
------------
FRANCE--9.3%
GOVERNMENT/AGENCY--9.3%
Government of France
7.00%, 4/25/06................. XEU 650 864,084
8.50%, 11/25/02................ FRF 3,600 816,305
------------
Total French Securities
(cost $1,676,496).............. 1,680,389
------------
GERMANY--1.2%
GOVERNMENT/AGENCY--1.2%
Federal Republic of Germany
8.25%, 9/20/01
(cost $220,144)................ DEM 300 223,206
------------
ITALY--4.6%
GOVERNMENT/AGENCY--4.6%
Republic of Italy
10.00%, 8/01/03
(cost $732,292)................ LIRA 1,100,000 830,257
------------
JAPAN--3.2%
GOVERNMENT/AGENCY--3.2%
Export Import Bank of Japan
4.375%, 10/01/03
(cost $617,937)................ JPY 60,000 585,442
------------
SPAIN--9.8%
GOVERNMENT/AGENCY--9.8%
Kingdom of Spain
5.75%, 3/23/02................. JPY 85,000 $ 873,413
7.90%, 2/28/02................. ESP 110,000 903,555
------------
Total Spanish Securities
(cost $1,781,334).............. 1,776,968
------------
SWEDEN--4.7%
GOVERNMENT/AGENCY--4.7%
Kingdom of Sweden
10.25%, 5/05/03
(cost $854,330)................ SEK 4,800 856,538
------------
UNITED KINGDOM--4.7%
GOVERNMENT/AGENCY--4.7%
U.K. Treasury
8.50%, 12/07/05
(cost $709,902)................ GBP 460 839,547
------------
UNITED STATES--30.3%
GOVERNMENT/AGENCY--30.3%
U.S. Treasury Notes
5.875%, 2/15/04................ US$ 950 924,910
6.25%, 2/15/03................. 1,700 1,697,875
6.375%, 8/15/02................ 1,900 1,912,464
7.50%, 5/15/02................. 900 951,606
------------
Total United States Securities
(cost $5,451,037).............. 5,486,855
------------
MULTI-NATIONAL--13.6%
Asian Development Bank
5.625%, 2/18/02................ JPY 85,000 866,991
Intermediate America
Development Bank
6.75%, 4/29/03................. DEM 1,100 760,593
International Bank for
Reconstruction & Development
4.50%, 3/20/03................. JPY 85,000 836,256
------------
Total Multi-National Securities
(cost $2,552,307).............. 2,463,840
------------
TOTAL INVESTMENTS--95.3%
(cost $17,078,982)............. 17,256,550
Other assets less liabilities--4.7% 860,540
------------
NET ASSETS--100.0%................. $ 18,117,090
============
- -------------------------------------------------------------------------------
(a) Security segregated to collateralize forward exchange currency contracts
with an aggregate market value of $782,008. See Notes to Financial
Statements.
B-3
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON AND
PREFERRED STOCKS--95.1%
BASIC INDUSTRIES--2.8%
CHEMICALS--0.8%
Dow Chemical Co........................... 13,100 $ 1,026,713
------------
CONTAINERS--1.3%
Crown Cork & Seal, Inc.
4.5% conv. pfd......................... 31,000 1,612,000
------------
PAPER & FOREST
PRODUCTS--0.7%
Louisiana-Pacific Corp. .................. 40,000 845,000
------------
3,483,713
------------
CAPITAL GOODS--3.9%
ELECTRICAL EQUIPMENT--1.6%
General Electric Co....................... 20,400 2,017,050
------------
MACHINERY--1.3%
Allied-Signal, Inc........................ 7,000 469,000
Cooper Industries, Inc.................... 27,000 1,137,375
------------
1,606,375
------------
POLLUTION CONTROL--1.0%
WMX Technologies, Inc..................... 38,300 1,249,537
------------
4,872,962
------------
CONSUMER
MANUFACTURING--1.5%
AUTO & RELATED--1.5%
Goodyear Tire & Rubber Co................. 37,450 1,923,994
------------
CONSUMER SERVICES--12.6%
BROADCASTING &
CABLE--4.7%
AirTouch Communications, Inc.*............ 54,000 1,363,500
Comcast Corp. Cl.A SPL.................... 74,900 1,334,156
Liberty Media Group Cl.A*................. 25,000 714,062
Lin Television Corp.*..................... 28,000 1,179,500
TCI Group Series A*....................... 30,000 391,875
TCI Satellite Entertainment, Inc.*........ 3,000 29,813
Vodafone Group PLC (ADR).................. 22,000 910,250
------------
5,923,156
------------
ENTERTAINMENT &
LEISURE--0.8%
Time Warner, Inc.......................... 28,000 1,050,000
------------
PRINTING & PUBLISHING--1.0%
New York Times Co. Cl.A................... 33,000 1,254,000
------------
RESTAURANTS &
LODGING--0.4%
Brinker International, Inc.*.............. 31,000 $ 496,000
------------
RETAILING--5.7%
AutoZone, Inc.*........................... 56,100 1,542,750
CompUSA, Inc.*............................ 27,500 567,187
Dayton Hudson Corp........................ 30,000 1,177,500
Federated Department Stores, Inc.*........ 25,000 853,125
OfficeMax, Inc.*.......................... 43,000 456,875
Price/Costco, Inc.*....................... 24,900 627,169
Reebok International Ltd.................. 25,000 1,050,000
Sears, Roebuck & Co....................... 22,000 1,014,750
------------
7,289,356
------------
16,012,512
------------
<PAGE>
CONSUMER STAPLES--15.9%
BEVERAGES--0.9%
Anheuser-Busch Cos., Inc.................. 29,000 1,160,000
------------
COSMETICS--0.5%
Gillette Co............................... 7,700 598,675
------------
FOOD--8.0%
American Brands, Inc...................... 22,000 1,091,750
Campbell Soup Co.......................... 50,000 4,012,500
General Mills, Inc........................ 19,000 1,204,125
Kroger Co.*............................... 12,400 576,600
Nabisco Holdings Corp. Cl.A............... 29,250 1,137,094
PepsiCo, Inc.............................. 71,900 2,103,075
------------
10,125,144
------------
HOUSEHOLD PRODUCTS--1.4%
Black & Decker Corp....................... 23,000 692,875
Sunbeam Corp.............................. 42,000 1,081,500
------------
1,774,375
------------
TOBACCO--5.1%
Philip Morris Cos., Inc................... 29,250 3,294,281
RJR Nabisco Holdings Corp................. 94,500 3,213,000
------------
6,507,281
------------
20,165,475
------------
ENERGY--8.3%
DOMESTIC INTEGRATED--6.9%
Amoco Corp................................ 16,200 1,304,100
Apache Corp............................... 16,500 583,687
Exxon Corp................................ 38,000 3,724,000
Mobil Corp................................ 25,700 3,141,825
------------
8,753,612
------------
B-4
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
OIL & GAS SERVICES--0.5%
Transocean Offshore, Inc.................. 10,400 $ 651,300
------------
PIPELINES--0.9%
Enron Corp................................ 24,800 1,069,500
------------
10,474,412
------------
FINANCE--14.6%
BANKING & CREDIT--6.7%
Chase Manhattan Corp...................... 12,000 1,071,000
First Chicago NBD Corp.................... 22,448 1,206,580
First Union Corp.......................... 34,600 2,560,400
J.P. Morgan & Co., Inc.................... 13,000 1,269,125
Wells Fargo & Co.......................... 8,600 2,319,850
------------
8,426,955
------------
BROKERAGE & MONEY
MANAGEMENT--1.7%
Merrill Lynch & Co., Inc.................. 26,500 2,159,750
------------
INSURANCE--5.7%
Allstate Corp............................. 25,250 1,193,062
General Reinsurance Corp.................. 11,500 1,814,125
ITT Hartford Group, Inc................... 28,800 1,944,000
PMI Group, Inc............................ 5,700 315,638
Travelers Group, Inc...................... 44,466 2,017,645
------------
7,284,470
------------
REAL ESTATE--0.5%
Starwood Lodging Trust.................... 12,000 661,500
------------
18,532,675
------------
HEALTH CARE--9.4%
BIOTECHNOLOGY--1.5%
Centocor, Inc.*........................... 53,400 1,912,388
------------
DRUGS--4.8%
Amgen, Inc.*.............................. 6,700 364,731
Bristol-Myers Squibb Co................... 13,500 1,468,125
Merck & Co., Inc.......................... 54,000 4,279,500
------------
6,112,356
------------
MEDICAL PRODUCTS--1.3%
Abbott Laboratories....................... 32,000 1,624,000
------------
MEDICAL SERVICES--1.8%
Columbia/HCA Healthcare Corp.............. 48,300 1,968,225
Value Health, Inc.*....................... 17,000 331,500
------------
2,299,725
------------
11,948,469
------------
MULTI INDUSTRY--1.8%
Tyco International Ltd.................... 19,100 $ 1,009,913
Whitman Corp.............................. 55,000 1,258,125
------------
2,268,038
------------
TECHNOLOGY--17.6%
COMMUNICATIONS
EQUIPMENT--3.5%
Nokia Corp. (ADR)......................... 36,800 2,120,600
Scientific-Atlanta, Inc................... 71,000 1,065,000
Teleport Communications Group, Inc.*...... 40,600 1,238,300
------------
4,423,900
------------
COMPUTER HARDWARE--2.2%
Compaq Computer Corp.*.................... 14,350 1,065,487
International Business Machines Corp...... 10,950 1,653,450
------------
2,718,937
------------
COMPUTER SOFTWARE &
SERVICES--0.9%
Electronic Data Systems Corp.............. 26,000 1,124,500
------------
OFFICE EQUIPMENT &
SERVICES--1.2%
Xerox Corp................................ 29,700 1,562,963
------------
SEMI-CONDUCTORS &
RELATED--4.2%
Atmel Corp.*.............................. 48,700 1,619,275
Intel Corp................................ 14,800 1,937,875
National Semiconductor Corp.*............. 74,373 1,812,842
------------
5,369,992
------------
TELECOMMUNICATIONS--5.6%
AT & T Corp............................... 140,400 6,107,400
MCI Communications Corp................... 32,000 1,046,000
------------
7,153,400
------------
22,353,692
------------
TRANSPORTATION--2.4%
RAILROADS--1.9%
Canadian Pacific, Ltd..................... 42,000 1,113,000
Union Pacific Corp........................ 21,000 1,262,625
------------
2,375,625
------------
TRUCKING--0.5%
Xtra Corp................................. 16,000 694,000
------------
3,069,625
------------
B-5
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
UTILITIES--4.3%
ELECTRIC & GAS--4.3%
Allegheny Power Systems, Inc.............. 17,000 $ 516,375
CINergy Corp.............................. 15,000 500,625
CMS Energy Corp........................... 16,000 538,000
FPL Group, Inc............................ 23,750 1,092,500
Houston Industries, Inc................... 15,100 341,638
NIPSCO Industries, Inc.................... 15,500 614,187
Pinnacle West Capital Corp................ 19,000 603,250
Texas Utilities Co........................ 30,000 1,222,500
------------
5,429,075
------------
Total Common and Preferred Stocks
(cost $107,803,328).................... 120,534,642
------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SHORT-TERM INVESTMENTS--4.6%
COMMERCIAL PAPER--4.6%
American Express Co.
6.30%, 1/03/97......................... $ 2,925 $ 2,923,976
Prudential Funding
6.00%, 1/02/97......................... 2,906 2,905,516
------------
Total Short-Term Investments
(amortized cost $5,829,492)............ 5,829,492
------------
TOTAL INVESTMENTS--99.7%
(cost $113,632,820).................... 126,364,134
Other assets less liabilities--0.3%....... 365,271
------------
NET ASSETS--100.0%........................ $126,729,405
============
- -------------------------------------------------------------------------------
* Non-income producing security.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-6
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
SHORT-TERM MULTI-MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
AUSTRALIA--13.2%
GOVERNMENT/AGENCY--13.2%
Commonwealth of Australia
12.00%, 7/15/99 (a)
(cost $943,204)................ AU$ 1,050 $ 940,777
------------
CANADA--7.5%
GOVERNMENT/AGENCY--7.5%
Government of Canada
6.50%, 8/01/99 (a)
(cost $530,561)................ CA$ 700 534,229
------------
DENMARK--3.1%
GOVERNMENT/AGENCY--3.1%
Kingdom of Denmark
9.00%, 11/15/98
(cost $236,627)................ DKK 1,200 221,837
------------
FINLAND--3.5%
GOVERNMENT/AGENCY--3.5%
Republic of Finland
11.00%, 1/15/99 (a)
(cost $240,448)................ FIM 1,000 247,783
------------
GERMANY--3.0%
GOVERNMENT/AGENCY--3.0%
Federal Republic of Germany
5.75%, 5/28/99 (a)
(cost $211,220)................ DEM 315 214,203
------------
NORWAY--3.0%
GOVERNMENT/AGENCY--3.0%
Kingdom of Norway
9.00%, 1/31/99 (a)
(cost $210,999)................ NOK 1,250 210,904
------------
SPAIN--2.9%
GOVERNMENT/AGENCY--2.9%
Kingdom of Spain
7.40%, 7/30/99 (a)
(cost $205,144)................ ESP 26,000 $ 208,501
------------
SWEDEN--4.2%
GOVERNMENT/AGENCY--4.2%
Kingdom of Sweden
11.00%, 1/21/99 (a)
(cost $297,725)................ SEK 1,800 296,672
------------
UNITED KINGDOM--1.9%
GOVERNMENT/AGENCY--1.9%
Exchequer
12.25%, 3/26/99 (a)
(cost $126,353)................ GBP 70 133,004
------------
UNITED STATES--52.5%
GOVERNMENT/AGENCY--14.0%
U.S. Treasury Note
5.875%, 11/15/99 (a)........... US$ 1,000 996,090
------------
TIME DEPOSIT--38.5%
State Street Bank and Trust Co.
5.00%, 1/02/97................. 2,742 2,742,000
------------
Total United States Securities
(cost $3,740,217).............. 3,738,090
------------
MULTI-NATIONAL--2.6%
International Bank for
Reconstruction &
Development
11.50%, 10/09/97 (a)
(cost $186,176)................ CZK 5,000 184,193
------------
TOTAL INVESTMENTS--97.4%
(cost $6,928,674).............. 6,930,193
Other assets less liabilities--2.6% 182,111
------------
NET ASSETS--100.0%................. $ 7,112,304
============
- -------------------------------------------------------------------------------
(a) Securities segregated to collateralize forward exchange currency
contracts with an aggregate market value of $3,966,356. See Notes to
Financial Statements.
B-7
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
PREFERRED STOCKS--0.2%
FINANCE--0.2%
Banesto Holdings Ltd.
10.50% Conv. Series A (a)(b)
(cost $49,725)......................... 1,800 $ 54,000
------------
CORPORATE DEBT
OBLIGATIONS--33.7%
ASSET BACKED--3.2%
Chemical Master Credit Card Trust I
5.98%, 9/15/08......................... $ 1,000 947,810
------------
FINANCE--13.9%
First Union Capital
8.04%, 12/01/26 (a).................... 1,000 1,006,670
Ford Motor Credit Co.
6.125%, 1/09/06........................ 500 469,470
Goldman Sachs Group L.P.
7.25%, 10/01/05 (a).................... 500 506,038
John Hancock Mutual Life
Insurance Co.
7.375%, 2/15/24 (a).................... 1,000 963,870
Wachovia Corp.
6.375%, 4/15/03........................ 75 73,758
Zions Institutional Capital Trust A
8.536%, 12/15/26 (a)................... 1,000 1,030,360
------------
4,050,166
------------
INDUSTRIAL--1.6%
International Business Machines
Corp.
7.125%, 12/01/96....................... 500 476,230
------------
YANKEES--15.0%
RAS Laffan Liquefied Natural Gas
8.294%, 3/15/14 (a).................... 1,250 1,275,000
Reliance Industries, Ltd.
10.375%, 6/24/16 (a)................... 1,000 1,082,500
Republic of Columbia
8.70%, 2/15/16......................... 500 482,255
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
Sociedad Quimira y Minera
7.70%, 9/15/06 (a)..................... $ 1,000 $ 1,024,492
St. George Bank, Ltd.
7.15%, 10/15/05 (a).................... 500 499,210
------------
4,363,457
------------
Total Corporate Debt Obligations
(cost $9,802,780)...................... 9,837,663
------------
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS--52.3%
U.S. TREASURY SECURITIES--31.9%
U.S. Treasury Bond
6.50%, 11/15/26........................ 160 157,026
U.S. Treasury Notes
5.00%, 1/31/98......................... 3,900 3,872,583
6.50%, 10/15/06........................ 650 653,555
7.125%, 9/30/99........................ 4,480 4,603,917
------------
9,287,081
------------
FEDERAL AGENCY -
MORTGAGES--12.9%
Federal National Mortgage
Association
7.00%, 4/01/26......................... 1,746 1,707,234
Government National Mortgage
Association
7.00%, 7/15/23......................... 81 79,304
7.50%, 4/15/26......................... 1,981 1,981,341
------------
3,767,879
------------
FEDERAL AGENCY--7.5%
AID - Israel
8.00%, 11/15/01........................ 200 213,248
Overseas Private Investment Corp.
6.08%, 8/15/04......................... 1,000 981,810
Student Loan Marketing
Association
6.05%, 9/14/00......................... 1,000 992,810
------------
2,187,868
------------
Total U.S. Government and
Agency Obligations
(cost $15,322,294)..................... 15,242,828
------------
B-8
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SOVEREIGN DEBT
OBLIGATIONS--10.8%
AUSTRALIA--2.1%
Commonwealth of Australia
8.75%, 8/15/08 (b)............ AU$ 700 $ 611,088
------------
MEXICO--5.2%
United Mexican States
7.5625%, 8/06/01 (a)........... US$ 1,500 1,505,625
------------
POLAND--3.5%
Republic of Poland
4.00%, 10/27/14 (c)............ 1,200 1,018,500
------------
Total Sovereign Debt Obligations
(cost $3,004,460).............. 3,135,213
------------
SHORT-TERM INVESTMENTS--1.8%
TIME DEPOSIT--1.8%
State Street Bank and Trust Co.
5.00%, 1/02/97
(amortized cost $522,000).............. $ 522 $ 522,000
------------
TOTAL INVESTMENTS--98.8%
(cost $28,701,259)..................... 28,791,704
Other assets less liabilities--1.2%....... 358,200
------------
NET ASSETS--100.0%........................ $ 29,149,904
============
- -------------------------------------------------------------------------------
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1996, the aggregate market value of these securities amounted to $8,947,765
or 30.7% of net assets.
(b) Securities segregated to collateralize forward exchange currency contracts
with an aggregate market value of $665,088.
(c) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at December 31, 1996.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-9
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON AND
PREFERRED STOCKS--62.6%
BASIC INDUSTRIES--1.9%
CHEMICALS--0.9%
Dow Chemical Co........................... 1,500 $ 117,563
Morton International, Inc................. 2,900 118,175
------------
235,738
------------
CONTAINERS--0.5%
Crown Cork & Seal, Inc.
4.5% conv. pfd......................... 2,600 135,200
------------
PAPER & FOREST
PRODUCTS--0.5%
Louisiana-Pacific Corp.................... 6,000 126,750
------------
497,688
------------
CAPITAL GOODS--2.4%
ELECTRICAL EQUIPMENT--1.1%
General Electric Co....................... 2,800 276,850
------------
MACHINERY--0.9%
Allied-Signal, Inc........................ 3,400 227,800
------------
POLLUTION CONTROL--0.4%
WMX Technologies, Inc..................... 3,500 114,187
------------
618,837
------------
CONSUMER
MANUFACTURING--1.1%
AUTO & RELATED--1.1%
Goodyear Tire & Rubber Co................. 5,400 277,425
------------
CONSUMER SERVICES--7.7%
BROADCASTING &
CABLE--2.6%
AirTouch Communications, Inc.*............ 8,700 219,675
Comcast Corp. Cl.A SPL.................... 8,200 146,062
Liberty Media Group Cl.A*................. 5,100 145,669
Lin Television Corp.*..................... 4,000 168,500
------------
679,906
------------
ENTERTAINMENT &
LEISURE--1.0%
Carnival Corp. Cl.A....................... 1,700 56,100
ITT Corp.*................................ 1,200 52,050
Time Warner, Inc.......................... 3,900 146,250
------------
254,400
------------
PRINTING & PUBLISHING--0.6%
New York Times Co. Cl.A................... 3,900 148,200
------------
RESTAURANTS &
LODGING--0.6%
Brinker International, Inc.*.............. 4,300 $ 68,800
Wendy's International, Inc................ 4,300 88,150
------------
156,950
------------
RETAILING--2.9%
AutoZone, Inc.*........................... 8,100 222,750
Dayton Hudson Corp........................ 4,100 160,925
Federated Department Stores, Inc.*........ 3,300 112,613
Price/Costco, Inc.*....................... 4,400 110,825
Sears, Roebuck & Co....................... 3,100 142,987
------------
750,100
------------
1,989,556
------------
CONSUMER STAPLES--10.4%
BEVERAGES--0.6%
Anheuser-Busch Cos., Inc.................. 4,000 160,000
------------
COSMETICS--0.3%
Gillette Co............................... 1,000 77,750
------------
FOOD--5.4%
American Brands, Inc...................... 3,200 158,800
Campbell Soup Co.......................... 6,600 529,650
General Mills, Inc........................ 2,600 164,775
Kroger Co.*............................... 1,700 79,050
Nabisco Holdings Corp. Cl.A............... 4,100 159,387
PepsiCo, Inc.............................. 10,200 298,350
------------
1,390,012
------------
HOUSEHOLD PRODUCTS--1.0%
Black & Decker Corp....................... 3,400 102,425
Newell Co................................. 2,700 85,050
Sunbeam Corp.............................. 3,000 77,250
------------
264,725
------------
TOBACCO--3.1%
Philip Morris Cos., Inc................... 4,300 484,288
RJR Nabisco Holdings Corp................. 9,500 323,000
------------
807,288
------------
2,699,775
------------
ENERGY--5.0%
DOMESTIC INTEGRATED--3.8%
Exxon Corp................................ 5,300 519,400
Mobil Corp................................ 3,800 464,550
------------
983,950
------------
B-10
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
OIL & GAS SERVICES--0.6%
Apache Corp............................... 2,100 $ 74,287
Transocean Offshore, Inc.................. 1,400 87,675
------------
161,962
------------
PIPELINES--0.6%
Enron Corp................................ 3,400 146,625
------------
1,292,537
------------
FINANCE--9.7%
BANKING & CREDIT--3.8%
Chase Manhattan Corp...................... 1,740 155,295
First Chicago NBD Corp.................... 2,922 157,058
First Union Corp.......................... 4,700 347,800
J.P. Morgan & Co., Inc.................... 1,700 165,962
Wells Fargo & Co.......................... 600 161,850
------------
987,965
------------
BROKERAGE & MONEY
MANAGEMENT--1.1%
Merrill Lynch & Co., Inc.................. 2,500 203,750
Morgan Stanley Group, Inc................. 1,400 79,975
------------
283,725
------------
INSURANCE--4.0%
General Reinsurance Corp.................. 1,800 283,950
ITT Hartford Group, Inc................... 4,000 270,000
PMI Group, Inc............................ 3,400 188,275
Travelers Group, Inc...................... 6,266 284,320
------------
1,026,545
------------
REAL ESTATE--0.4%
Starwood Lodging Trust.................... 1,600 88,200
------------
OTHER--0.4%
Dean Witter, Discover & Co................ 1,700 112,625
------------
2,499,060
------------
HEALTH CARE--7.3%
BIOTECHNOLOGY--1.1%
Centocor, Inc.*........................... 8,100 290,081
------------
DRUGS--3.9%
Amgen, Inc.*.............................. 1,500 81,656
Bristol-Myers Squibb Co................... 2,300 250,125
Merck & Co., Inc.......................... 8,700 689,475
------------
1,021,256
------------
MEDICAL PRODUCTS--0.9%
Abbott Laboratories....................... 4,400 223,300
------------
MEDICAL SERVICES--1.4%
Columbia/HCA Healthcare Corp.............. 6,450 $ 262,838
United Healthcare Corp.................... 1,500 67,500
Value Health, Inc.*....................... 1,100 21,450
------------
351,788
------------
1,886,425
------------
MULTI INDUSTRY--1.9%
Tyco International Ltd.................... 3,300 174,488
U.S. Industries, Inc.*.................... 5,000 171,875
Whitman Corp.............................. 6,200 141,825
------------
488,188
------------
TECHNOLOGY--12.0%
COMMUNICATIONS
EQUIPMENT--1.9%
Nokia Corp. (ADR)......................... 6,300 363,038
Scientific-Atlanta, Inc................... 8,500 127,500
------------
490,538
------------
COMPUTER HARDWARE--2.6%
Compaq Computer Corp.*.................... 2,000 148,500
Intel Corp................................ 2,200 288,062
International Business Machines Corp...... 1,500 226,500
------------
663,062
------------
COMPUTER SOFTWARE &
SERVICES--0.6%
Electronic Data Systems Corp.............. 3,500 151,375
------------
OFFICE EQUIPMENT &
SERVICES--0.9%
Xerox Corp................................ 4,600 242,075
------------
SEMI-CONDUCTORS &
RELATED--1.6%
Atmel Corp.*.............................. 4,000 133,000
National Semiconductor Corp.*............. 12,000 292,500
------------
425,500
------------
TELECOMMUNICATIONS--4.4%
AT & T Corp............................... 19,300 839,550
MCI Communications Corp.*................. 9,000 294,187
------------
1,133,737
------------
3,106,287
------------
TRANSPORTATION--0.9%
RAILROADS--0.9%
Canadian Pacific, Ltd..................... 2,900 76,850
Union Pacific Corp........................ 2,800 168,350
------------
245,200
------------
B-11
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TOTAL RETURN PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
UTILITIES--2.3%
ELECTRIC & GAS--2.3%
Allegheny Power Systems, Inc.............. 2,400 $ 72,900
CINergy Corp.............................. 2,000 66,750
FPL Group, Inc............................ 5,200 239,200
Houston Industries, Inc................... 2,600 58,825
Texas Utilities Co........................ 4,100 167,075
------------
604,750
------------
Total Common and Preferred Stocks
(cost $14,409,043)..................... 16,205,728
------------
U.S. GOVERNMENT
OBLIGATIONS--30.2%
U.S. Treasury Notes
4.75%, 8/31/98......................... $ 2,317 2,277,541
6.50%, 10/15/06........................ 2,000 2,010,940
7.25%, 8/15/04......................... 3,355 3,531,138
------------
Total U.S. Government Obligations
(cost $7,861,801)...................... 7,819,619
------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SHORT-TERM INVESTMENTS--6.6%
TIME DEPOSIT--6.6%
State Street Bank and Trust Co.
5.00%, 1/02/97
(amortized cost $1,706,000)............ $ 1,706 $ 1,706,000
------------
TOTAL INVESTMENTS--99.4%
(cost $23,976,844)..................... 25,731,347
Other assets less liabilities--0.6%....... 144,003
------------
NET ASSETS--100.0%......................... $ 25,875,350
============
- -------------------------------------------------------------------------------
* Non-income producing security.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-12
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--92.0%
AUSTRALIA--1.5%
Coca Cola Amatil Ltd...................... 13,171 $ 140,808
Mayne Nickless Ltd........................ 12,000 82,028
Qantas Airways Ltd........................ 12,021 20,065
WMC, Ltd.................................. 23,168 146,032
Woolworths Ltd............................ 108,073 260,282
------------
649,215
------------
BELGIUM--0.7%
Delhaize-Le Lion S.A...................... 2,500 148,530
Kredietbank S.A........................... 500 163,896
------------
312,426
------------
BRAZIL--0.1%
Dixie Toga S.A. pfd....................... 18,600 14,141
Industries Klabin de Papel E Celulose
S.A. pfd............................... 16,000 14,782
------------
28,923
------------
DENMARK--1.2%
BG Bank A/S............................... 1,600 74,964
Den Danske Bank........................... 3,790 305,604
ISS International Service System Cl.B..... 5,440 143,138
------------
523,706
------------
FINLAND--1.5%
Kesko..................................... 4,900 69,133
Nokia AB Cl.A............................. 3,038 176,204
Orion-Yhtymne OY Series B................. 5,680 218,556
UPM-Kymmene Corp.*........................ 9,700 203,489
------------
667,382
------------
FRANCE--6.6%
Alcatel Alsthom........................... 1,300 104,431
Bouygues.................................. 2,214 229,572
Compagnie Generale des Eaux............... 1,639 203,118
GTM Entrepose S.A......................... 1,640 75,860
Legris Ind. S.A........................... 3,960 166,765
Pechiney S.A.............................. 3,730 156,288
Salomon S.A............................... 1,400 120,073
SGS-Thomson Microelectronics N.V.*........ 1,530 108,222
Simco S.A................................. 1,204 105,119
Societe Centrale des Assurances
Generales de France.................... 7,540 243,413
Societe des Immuebles..................... 1,297 76,493
Societe Francaise d'Invetissements
Immobiliers et de Gestion.............. 1,295 93,846
Societe Nacionale Elf Aquitaine........... 4,400 400,524
Total S.A. (ADR).......................... 1,270 $ 51,118
Total S.A. Cl.B........................... 5,214 424,074
Union du Credit Bail Immobilier........... 1,490 148,182
Union Immobilier de France................ 980 79,990
Usinor Sacilor............................ 8,900 129,508
------------
2,916,596
------------
GERMANY--5.8%
Bayer AG.................................. 12,280 501,159
Deutsche Lufthansa AG..................... 18,100 247,011
Deutsche Telekom AG*...................... 4,130 87,093
Henkel KGaA, pfd.......................... 5,634 283,018
Hornbach Holding AG pfd................... 2,400 171,562
KSB AG - Vorzug pfd....................... 960 148,479
Preussag AG............................... 800 181,180
Schmalbach Lubeca AG*..................... 1,000 245,646
Suedzucker AG............................. 321 156,662
Veba AG................................... 7,050 407,753
Volkswagen AG............................. 319 132,675
------------
2,562,238
------------
HONG KONG--1.7%
Asia Satellite Telecom Ltd.*.............. 3,000 6,962
Citic Pacific Ltd......................... 23,000 133,519
First Pacific Co. Ltd..................... 74,837 97,241
Guangshen Railway Co. Ltd. (ADR)*......... 3,000 61,875
Hong Kong and China Gas Co. Ltd. ......... 27,440 53,039
warrants, expiring 9/30/97* ........... 1,620 900
Hysan Development Co. Ltd. ............... 12,000 47,786
warrants, expiring 4/30/98* ........... 500 453
New World Development Co. Ltd............. 9,226 62,326
Swire Pacific Ltd. Cl.A................... 11,000 104,887
Television Broadcasts of
Hong Kong Ltd.......................... 32,000 127,843
Wharf (Holdings) Ltd...................... 15,000 74,859
------------
771,690
------------
INDIA--0.9%
Bajaj Auto Ltd. (GDR) (a)................. 5,800 192,850
Industrial Credit & Investment
Corp. of India Ltd. (GDR)* (a)......... 8,000 76,000
State Bank of India (GDR)* (a)............ 7,000 118,090
------------
386,940
------------
INDONESIA--1.3%
Indosat................................... 78,000 214,649
PT Hanjaya Mandala Sampoema
(Foreign).............................. 49,000 261,389
PT Telekomunikasi Indonesia .............. 41,000 70,734
B-13
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
PT Telekomunikasi Indonesia (ADR) ........ 1,000 $ 34,500
------------
581,272
------------
ITALY--1.9%
Ente Nazionale Idrocarburi S.p.A.......... 46,800 240,170
Instituto Nazionale delle Assicurazioni... 152,900 199,163
Magneti Marelli S.p.A..................... 48,200 59,892
Saipem S.p.A.............................. 19,950 91,794
Societa Italiana Per L'Eserreizio
delle Telecommunicazioni, P.A.......... 102,200 265,437
------------
856,456
------------
JAPAN--31.5%
Amano Corp................................ 15,000 160,608
Asahi Glass Co. Ltd....................... 30,000 282,359
Bank of Tokyo-Mitsubishi Bank............. 18,200 337,881
Canon, Inc................................ 16,000 353,683
Chiba Bank Ltd............................ 10,000 68,215
Dai Nippon Printing Co. Ltd............... 11,000 192,816
Daifuku Co. Ltd........................... 12,000 151,282
Daito Trust Construction Co. Ltd.......... 15,700 174,881
Daiwa Securities Co. Ltd.................. 6,000 53,363
DDI Corp.................................. 125 826,785
East Japan Railway Co..................... 40 179,950
Eisai Co.................................. 8,250 162,421
Fuji Photo Film Co. (ORD)................. 3,000 98,955
Furukawa Co. Ltd.......................... 25,000 84,190
Hirose Electric Co........................ 5,000 289,699
Honda Motor Co............................ 5,000 142,906
House Foods Industry...................... 5,000 80,736
Hoya Corp................................. 10,000 392,885
Ishikawajima-Harima Heavy Industries...... 17,000 75,598
Ito - Yokado Co. Ltd...................... 2,000 87,039
Japan Securities Finance.................. 17,000 198,169
Japan Tobacco, Inc........................ 22 149,124
Kamigumi Co. Ltd.......................... 12,000 78,750
Kandenko Co. Ltd.......................... 11,300 107,331
Kao Corp.................................. 21,000 244,798
Kirin Brewery Co. Ltd..................... 8,000 78,750
Kokuyo.................................... 7,000 172,869
Kuraray Co. Ltd........................... 20,000 184,785
Kyocera Corp.............................. 2,000 124,687
Maeda Road Construction Corp.............. 4,000 46,283
Matsushita Electric Industrial............ 24,000 391,676
Matsushita Electric Works................. 13,000 111,916
Mitsubishi Heavy Industries Ltd........... 23,000 182,713
Mitsubishi Materials Corp................. 12,000 48,493
Mitsubishi Oil Co......................... 22,000 131,647
Mitsui Marine & Fire Insurance
Co. Ltd................................ 24,000 $ 129,108
Mitsui Trust and Banking Co. Ltd.......... 44,000 343,839
National House Industrial Co.............. 11,000 146,274
NGK Insulators............................ 8,000 75,987
Nikko Securities Co. Ltd.................. 15,000 111,907
Nippon Express Co. Ltd.................... 18,000 123,409
Nippon Light Metal Co..................... 21,000 86,314
Nippon Steel Co........................... 46,000 135,843
Nisshin Steel Co. Ltd..................... 90,000 241,689
NKK Corp.*................................ 53,000 119,446
Nomura Securities Co. Ltd................. 16,000 240,394
Osaka Gas Co.............................. 42,000 114,964
Rohm Co................................... 11,000 721,872
Sankyo Co. Ltd............................ 2,000 56,644
Santen Pharmaceutical Co.................. 1,000 20,724
Seven-Eleven Japan Co. Ltd................ 10,400 608,859
Shimano, Inc.............................. 7,000 119,074
Shimizu Corp.............................. 15,000 112,037
Shiseido Co. Ltd.......................... 14,000 161,989
Sumitomo Electric Industries.............. 12,000 167,861
Sumitomo Marine & Fire Insurance Co....... 19,000 118,125
Sumitomo Realty & Development
Co. Ltd................................ 24,000 151,282
Sumitomo Rubber Industries................ 13,000 96,874
Taisho Pharmaceutical Co.................. 7,000 165,012
Takeda Chemical Industries................ 6,000 125,896
TDK Corp.................................. 8,000 521,544
Toagosei Co. Ltd.......................... 7,000 24,782
Tokai Bank................................ 17,000 177,619
Tokyo Electric Power Co................... 7,000 153,527
Tokyo Gas Cos. Ltd........................ 85,000 230,464
Tokyo Steel Manufacturing Co.............. 22,000 313,444
Toyo Kanetsu.............................. 13,000 45,126
Toyota Corp............................... 26,000 747,604
Ube Industries Ltd. ...................... 15,000 42,483
Ushio, Inc................................ 16,000 174,078
Yakult Honsha Co.......................... 10,000 103,618
Yamanouchi Pharmaceutical Co. Ltd......... 14,000 287,713
Yamatake-Honeywell........................ 7,000 113,030
Yamazaki Baking Co. Ltd................... 7,000 111,821
------------
13,990,519
------------
KOREA--0.7%
Korea Electric Power Corp. (ADR).......... 4,000 82,000
Korea Mobile Telecommunications
Corp. (ADR) (a)........................ 14,832 190,962
B-14
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
Pohang Iron & Steel Ltd. (ADR)............ 2,000 $ 40,500
------------
313,462
------------
MALAYSIA--1.0%
Ammb Holdings Bhd......................... 15,000 125,916
DCB Holdings Bhd
warrants, expiring 12/27/99*........... 2,750 4,138
Malakoff Bhd.............................. 17,000 83,469
Malayan Banking Bhd....................... 8,000 88,695
Resorts World Bhd......................... 37,000 168,481
------------
470,699
------------
NETHERLANDS--3.6%
Akzo Nobel N.V............................ 3,320 453,820
Apothekers Cooperative OPG................ 1,640 47,210
CSM N.V................................... 800 44,483
Fortis Amev N.V........................... 11,800 413,496
Internationale Nederlanden Groep N.V...... 11,639 419,314
Vendex International N.V.................. 5,150 220,437
------------
1,598,760
------------
NEW ZEALAND--0.6%
Fletcher Challenge Ltd.................... 26,424 44,274
Lion Nathan Ltd........................... 32,000 76,691
Telecom Corp. of New Zealand Ltd.......... 27,000 137,815
------------
258,780
------------
NORWAY--1.1%
Bergesen D.Y. ASA Cl.A.................... 11,700 283,280
Orkla ASA Cl.A............................ 1,540 106,362
Schibsted ASA............................. 3,740 68,204
Unitor ASA................................ 1,900 24,181
------------
482,027
------------
PHILIPPINES--0.2%
Manila Electric Co........................ 9,815 80,237
Philippine Commercial International
Bank................................... 1,000 13,118
------------
93,355
------------
PORTUGAL--0.1%
Telecel-Comunicacaoes Pessoais* (a)....... 550 35,118
------------
SINGAPORE--1.3%
Overseas Chinese Bank..................... 14,000 174,087
Overseas Union Banking Ltd. (Foreign)..... 20,000 154,363
Singapore Airlines Ltd.................... 2,000 18,152
Singapore Press Holdings Ltd. (Foreign)... 11,000 216,966
------------
563,568
------------
SPAIN--1.7%
Autopistas Concesionaria Espanola S.A..... 9,500 130,984
Banco Santander S.A....................... 2,070 $ 132,499
Repsol S.A................................ 6,300 241,664
Tabacalera S.A. Series A.................. 3,590 154,578
Viscofan Envolturas Celulosicas........... 6,430 94,104
------------
753,829
------------
SWEDEN--1.9%
Astra AB.................................. 5,500 271,778
Electrolux AB Series B.................... 1,590 92,324
Incentive AB Cl.B......................... 1,698 123,244
Sparbanken Sverige AB Cl.A (a)............ 4,300 73,769
Stora Kopparbergs Series B................ 19,705 268,709
------------
829,824
------------
SWITZERLAND--4.0%
Adecco S.A................................ 591 148,357
Baloise Holdings Ltd...................... 105 211,020
Nestle S.A................................ 326 349,990
Novartis AG*.............................. 627 718,538
Schindler Holdings AG..................... 90 97,833
Swissair AG*.............................. 189 152,923
Zurich Versicherungsgesellschaft.......... 334 92,826
------------
1,771,487
------------
TAIWAN--0.2%
Advanced Semiconductor Engineering
(GDR)* (a)............................. 8,100 77,355
------------
THAILAND--0.4%
Bangkok Bank Public Co. Ltd............... 4,000 38,681
Thai Farmers Bank Co...................... 24,625 153,630
------------
192,311
------------
UNITED KINGDOM--20.5%
Anglian Water Plc......................... 22,000 221,621
B.A.T. Industries Plc..................... 21,300 176,618
BAA Plc................................... 33,500 277,780
Barclays Plc.............................. 29,300 502,221
Bass Plc.................................. 14,580 205,324
BPB Plc................................... 17,600 115,786
British Aerospace Plc..................... 11,480 251,352
British Petroleum Co. Plc................. 36,600 438,924
British Sky Broadcast Group Plc........... 22,100 197,639
British Telecommunications Plc............ 37,400 253,092
BTR Plc................................... 73,500 358,874
Cadbury Schweppes Plc..................... 29,700 250,850
Compass Group Plc......................... 18,900 200,754
General Electric Co. Plc.................. 33,849 222,103
Glaxo Holdings Wellcome Plc............... 16,700 271,801
Grand Metropolitan Plc.................... 33,100 259,719
B-15
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
INTERNATIONAL PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
Hanson Plc................................ 99,100 $ 139,219
Hepworth Plc.............................. 17,100 73,826
Holliday Chemical Holdings Plc............ 48,600 101,788
Kingfisher Plc............................ 10,800 116,567
Ladbroke Group Plc........................ 61,300 243,646
National Grid Group Plc................... 92,400 308,686
National Westminster Bank Plc............. 18,350 215,660
Pearson Plc............................... 13,900 177,411
Rank Group Plc............................ 44,100 330,920
Reed International Plc.................... 17,600 331,074
Reuters Holdings Plc...................... 27,400 352,299
Rugby Group Plc........................... 88,000 141,717
Sainsbury (J.) Plc........................ 45,162 299,429
Sears Plc................................. 134,500 216,601
Shell Transport and Trading Co. Plc....... 10,950 189,848
Siebe Plc................................. 13,240 245,882
Smithkline Beecham Plc.................... 17,600 243,632
Tesco Plc................................. 8,500 51,550
TI Group Plc.............................. 34,700 344,206
Tomkins Plc............................... 47,500 219,719
United Assurance Group Plc................ 20,000 164,468
Vodafone Group Plc........................ 47,200 199,733
Wimpey (George) Plc....................... 91,500 195,948
------------
9,108,287
------------
Total Common Stocks and
Other Investments
(cost $39,371,024)..................... 40,796,225
------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
CONVERTIBLE BOND--0.4%
JAPAN--0.4%
Sumitomo Bank International
0.75%, 5/31/01 (a)
(cost $155,634)................ JPY 17,000 $ 155,416
------------
SHORT-TERM INVESTMENTS--7.4%
TIME DEPOSIT--7.4%
State Street Bank and Trust Co.
5.00%, 1/02/97
(amortized cost $3,273,000).... US$ 3,273 3,273,000
------------
TOTAL INVESTMENTS--99.8%
(cost $42,799,658)............. 44,224,641
Other assets less liabilities--0.2% 99,455
------------
NET ASSETS--100.0%................. $ 44,324,096
============
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$919,560 or 2.1% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-16
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS--99.1%
Federal Farm Credit Bank
5.35%, 1/23/97......................... $ 3,000 $ 2,990,192
5.46%, 1/23/97......................... 3,000 2,989,990
5.48%, 1/29/97......................... 3,500 3,485,082
Federal Home Loan Bank
5.31%, 2/21/97......................... 5,500 5,458,626
5.48%, 1/24/97......................... 3,500 3,487,746
Federal Home Loan Mortgage Corp.
5.27%, 1/14/97......................... 800 798,478
5.37%, 1/22/97......................... 3,000 2,990,603
5.42%, 1/22/97......................... 2,873 2,863,917
Federal National Mortgage Assn.
5.24%, 1/17/97......................... 8,500 8,480,204
5.36%, 3/12/97......................... 3,000 2,968,733
5.37%, 1/07/97......................... 3,020 3,017,297
5.38%, 2/18/97......................... 6,000 5,956,960
5.38%, 2/24/97......................... 3,425 3,397,360
5.40%, 2/10/97......................... 3,390 3,369,660
Tennessee Valley Authority
5.24%, 2/26/97......................... 1,500 1,487,773
5.26%, 3/26/97......................... 2,500 2,469,317
5.27%, 2/25/97......................... 1,500 1,487,923
U.S. Treasury Bill
4.75%, 1/16/97......................... 6,500 6,487,135
------------
TOTAL INVESTMENTS--99.1%
(cost $64,186,996)..................... 64,186,996
Other assets less liabilities--0.9%........ 582,295
------------
NET ASSETS--100.0%......................... $ 64,769,291
============
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-17
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SOVEREIGN DEBT
OBLIGATIONS--68.2%
COLLATERALIZED
BRADY BONDS--18.5%
ARGENTINA--5.1%
Republic of Argentina
5.25% Par Euro Bonds, 3/31/23 (a)
(cost $412,943)........................ $ 710 $ 448,187
------------
ECUADOR--3.6%
Republic of Ecuador
3.00%, 2/27/15......................... 370 227,604
Republic of Ecuador
6.50% Disc. (FRN), 2/28/25 (b)......... 130 90,025
------------
Total Ecuadorian Securities
(cost $229,475)........................ 317,629
------------
MEXICO--7.9%
United Mexican States
6.25%, 12/31/19
(cost $629,686)........................ 950 697,062
------------
NIGERIA--1.9%
Central Bank of Nigeria
6.25% Pars, 11/15/20 (a)
(cost $105,552)........................ 250 171,875
------------
Total Collateralized Brady Bonds
(cost $1,377,656)...................... 1,634,753
------------
LOAN PARTICIPATION &
ASSIGNMENT--14.6%
MOROCCO--3.8%
Kingdom of Morocco Restructuring &
Consolidation Loan Participation
7.375% (FRN), 1/01/09
(cost $321,174)........................ 400 330,250
------------
RUSSIA--10.8%
Vnesheconombank Loan Assignment
Zero Coupon, 9/14/04 *
(cost $883,533)........................ 1,200 957,750
------------
Total Loan Participation &
Assignment
(cost $1,204,707)...................... 1,288,000
------------
OTHER SOVEREIGN DEBT--35.1%
ARGENTINA--4.2%
Argentina Global
11.00%, 10/09/06
(cost $347,098)........................ $ 350 $ 368,375
------------
BRAZIL--5.3%
Republic of Brazil
6.5625% (FRN), 4/15/12
(cost $467,204)........................ 620 470,425
------------
BULGARIA--2.2%
Republic of Bulgaria
2.25% (FRN), 7/28/12
(cost $201,131)........................ 500 192,188
------------
CROATIA--2.2%
Republic of Croatia
6.6875% (FRN), 7/31/10
(cost $183,658)........................ 200 193,500
------------
MEXICO--2.0%
Mc-Cuernavaca Trust
9.25%, 7/25/01 (c)
(cost $176,570)........................ 203 179,853
------------
PANAMA--3.9%
Republic of Panama
3.50% IRB, 7/17/14 (c)
(cost $281,196)........................ 500 348,125
------------
PHILIPPINES--1.6%
Republic of Philippines
8.75%, 10/07/16 (c)
(cost $127,681)........................ 136 140,080
------------
POLAND--3.2%
Republic of Poland
4.00%, 10/27/14 (a)
(cost $223,776)........................ 330 280,088
------------
TRINIDAD & TOBAGO--0.6%
Republic of Trinidad & Tobago
11.75%, 10/03/04
(cost $49,730)......................... 50 56,000
------------
B-18
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
VENEZUELA--9.9%
Republic of Venezuela
6.50%, 12/18/07
(cost $867,337)........................ $ 1,000 $ 880,937
------------
Total Other Sovereign Debt
(cost $2,925,381)...................... 3,109,571
------------
Total Sovereign Debt Obligations
(cost $5,507,744)...................... 6,032,324
------------
CORPORATE DEBT
OBLIGATIONS--20.4%
FINANCIAL SERVICES--4.9%
App International Finance Company
B V Guaranteed Secured Note
11.75%, 10/01/05....................... 150 160,688
FSW International Finance Company
B V Guaranteed Secured Note
12.50%, 11/01/06 (c)................... 150 159,375
Home Holdings, Inc.
7.75%, 12/15/98........................ 200 89,000
8.625%, 12/15/03....................... 100 23,500
------------
Total Financial Services
(cost $579,998)........................ 432,563
------------
YANKEES--15.5%
AES China Generating Co., Ltd.
10.125%, 12/15/06...................... 500 518,750
Banco Nacional
7.25%, 2/02/04......................... $ 200 $ 176,750
Grupo Mexicano de Desarrollo
8.25%, 2/17/01......................... 240 146,100
Tevecap S.A.
12.625%, 11/26/04 (c).................. 300 307,875
Transportacion Maritima
Mexicana S.A.
9.25%, 5/15/03......................... 12 11,760
Zhuhai Highway Co.
11.50%, 7/01/08........................ 200 214,250
------------
Total Yankees
(cost $1,361,443)...................... 1,375,485
------------
Total Corporate Debt Obligations
(cost $1,941,441)...................... 1,808,048
------------
SHORT-TERM INVESTMENTS--8.0%
TIME DEPOSIT--8.0%
State Street Bank and Trust Co.
5.00%, 1/02/97
(amortized cost $703,000).............. 703 703,000
------------
TOTAL INVESTMENTS--96.6%
(cost $8,152,185)...................... 8,543,372
Other assets less liabilities--3.4%........ 304,034
------------
NET ASSETS--100.0%......................... $ 8,847,406
============
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at December 31, 1996.
(b) Coupon will fluctuate based upon an interest rate index. Stated interest
rate in effect at December 31, 1996.
(c) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December 31,
1996, the aggregate market value of these securities amounted to
$1,135,308 or 12.8% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-19
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
ARGENTINA--18.0%
GOVERNMENT OBLIGATIONS--18.0%
Republic of Argentina
Pensioner-Bocon Series I
3.41% (FRN), 4/01/01 (a)....... ARS 342 $ 295,304
3.41% (FRN), 4/01/07 (a)....... 3,779 2,659,735
Republic of Argentina
Pensioner-Bocon Series II
3.41% (FRN), 9/01/02 (a)....... 60 45,084
------------
Total Argentinian Securities
(cost $2,115,505).............. 3,000,123
------------
CANADA--15.3%
GOVERNMENT/AGENCY--15.3%
Government of Canada
6.50%, 6/01/04 (b)............. CA$ 850 633,555
8.00%, 6/01/23 (b)............. 500 406,594
Province of British Columbia
8.00%, 9/08/23 (b)............. 400 315,372
Province of Manitoba
7.75%, 12/22/25................ 450 348,557
Province of Ontario
8.25%, 12/01/05................ 275 223,727
Province of Quebec
7.75%, 3/30/06................. 325 253,250
Province of Saskatchewan
9.60%, 2/04/22................. 400 367,574
------------
Total Canadian Securities
(cost $2,367,769).............. 2,548,629
------------
MEXICO--16.3%
GOVERNMENT/AGENCY--16.3%
Mexican Treasury Bills
Zero Coupon, 1/23/97........... MXP 470 58,658
Zero Coupon, 3/06/97........... 3,778 457,758
Zero Coupon, 5/29/97........... 5,000 572,704
Zero Coupon, 6/05/97........... 14,390 1,640,661
------------
Total Mexican Securities
(amortized cost $2,753,629).... 2,729,781
------------
UNITED STATES--49.4%
U.S. TREASURY SECURITIES--26.0%
U.S. Treasury Notes
6.25%, 10/31/01................ US$ 1,300 $ 1,301,222
6.50%, 4/30/99................. 85 86,036
7.125%, 9/30/99................ 320 328,851
7.25%, 8/15/04................. 2,500 2,631,250
------------
4,347,359
------------
FEDERAL AGENCY -
MORTGAGES--1.1%
Government National
Mortgage Association
9.00%, 9/15/24................. 167 176,524
------------
FEDERAL AGENCY--3.9%
Federal Home Loan Bank
7.26%, 9/06/01................. 200 206,812
Federal Home Loan
Mortgage Corp.
6.13%, 8/19/99................. 150 150,000
Federal National Mortgage
Association
5.05%, 11/10/98................ 305 300,044
------------
656,856
------------
<PAGE>
TIME DEPOSIT--18.4%
State Street Bank and Trust Co.
5.00%, 1/02/97................. 3,062 3,062,000
------------
Total United States Securities
(cost $8,147,794).............. 8,242,739
------------
TOTAL INVESTMENTS--99.0%
(cost $15,384,697)............. 16,521,272
Other assets less liabilities--1.0% 174,378
------------
NET ASSETS--100.0%................. $ 16,695,650
============
- -------------------------------------------------------------------------------
(a) Coupon will fluctuate based upon an interest rate index. Stated interest
rate in effect at December 31, 1996.
(b) Securities segregated to collateralize forward exchange currency contracts
with an aggregate market value of $1,355,521.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-20
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON AND
PREFERRED STOCKS--89.7%
UNITED STATES INVESTMENTS--81.3%
CONSUMER SERVICES--10.5%
BROADCASTING &
CABLE--10.5%
AirTouch Communications, Inc.
4.25% conv. pfd........................ 13,000 $ 588,250
Cablevision Systems Corp. * .............. 20,000 410,000
Comcast Corp. Cl.A ...................... 18,000 320,625
TCI Group
$2.125 Series A conv. pfd.............. 6,200 242,187
------------
1,561,062
------------
ENERGY--0.8%
PIPELINES--0.8%
Enron Corp. ............................. 2,800 120,750
------------
TECHNOLOGY--15.5%
COMMUNICATIONS
EQUIPMENT--3.9%
Ericsson (L.M.) Telephone Co. ........... 5,600 169,050
Teleport Communications Group, Inc. *..... 13,600 414,800
------------
583,850
------------
TELECOMMUNICATIONS--11.6%
AT & T Corp. ............................ 15,760 685,560
Frontier Corp. ......................... 21,000 475,125
MCI Communications Corp. ................ 10,400 339,950
Telephone and Data Systems, Inc. ........ 6,000 217,500
------------
1,718,135
------------
2,301,985
------------
UTILITIES--54.5%
ELECTRIC & GAS--54.5%
AGL Resources, Inc. ...................... 6,100 128,863
Allegheny Power Systems, Inc. ............ 17,800 540,675
American Electric Power, Inc. ............ 11,300 464,712
Baltimore Gas & Electric Co. ............. 5,600 149,800
Brooklyn Union Gas Co. .................. 4,600 138,575
Carolina Power & Light Co. .............. 9,000 328,500
CINergy Corp. ........................... 16,700 557,362
CMS Energy Corp. ........................ 17,200 578,350
DPL, Inc. ............................... 14,000 343,000
DQE, Inc. ............................... 6,600 191,400
Edison International .................... 22,000 437,250
FPL Group, Inc. ......................... 10,600 487,600
Houston Industries, Inc. ................ 20,500 $ 463,812
Illinova Corp. .......................... 8,700 239,250
Ipalco Enterprises, Inc. ................ 10,500 286,125
MCN Corp. ............................... 4,600 132,825
New Jersey Resources Corp. .............. 4,400 128,700
Northwest Natural Gas Co. ............... 5,250 126,656
Pacific Enterprises ..................... 4,100 124,538
People's Energy Corp. ................... 3,600 121,950
Piedmont Natural Gas Co., Inc. .......... 5,100 119,213
Pinnacle West Capital Corp. ............. 12,500 396,875
Public Service Co. of New Mexico ........ 18,600 365,025
Questar Corp. ........................... 3,500 128,625
Southwest Gas Corp. ..................... 7,000 134,750
Texas Utilities Co. ..................... 8,400 342,300
Washington Gas Light Co. ................ 5,600 126,700
Wicor, Inc. ............................. 3,500 125,563
Williams Cos., Inc.
$3.5 conv. pfd. ...................... 4,700 387,750
------------
8,096,744
------------
Total United States Investments
(cost $11,446,118)..................... 12,080,541
------------
FOREIGN INVESTMENTS--8.4%
BRAZIL--1.9%
Light Participacoes, S.A. * .............. 600,000 145,511
Telecomunicacoes Brasileras
S.A. (ADR)............................. 1,800 137,700
------------
283,211
------------
CHILE--0.7%
Compania de Telecommunicaciones
de Chile S.A. (ADR).................... 1,100 111,237
------------
FINLAND--1.9%
Nokia Corp. (ADR)......................... 4,800 276,600
------------
HONG KONG--0.9%
Consolidated Electric Power Asia (ADR).... 58,800 137,982
------------
KOREA--0.8%
Korea Electric Power Corp. (ADR).......... 4,020 117,032
------------
MEXICO--1.4% Telefonos de Mexico S.A.
Series L (ADR)......................... 6,200 204,600
------------
B-21
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
PERU--0.8%
Telefonica del Peru S.A. (ADR)............ 62,000 $ 115,382
------------
Total Foreign Investments
(cost $984,113)........................ 1,246,044
------------
Total Common and Preferred Stocks
(cost $12,430,231)..................... 13,326,585
------------
CONVERTIBLE BONDS--5.4%
3Com Corp.
10.25%, 11/01/01 (a)................... 305 676,338
International Cabletel, Inc.
7.25%, 4/15/05 (a)..................... 115 123,481
------------
Total Convertible Bonds
(cost $596,950)........................ 799,819
------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SHORT-TERM INVESTMENTS--3.3%
COMMERCIAL PAPER--3.3%
General Electric Capital Corp.
5.90%, 1/02/97
(amortized cost $499,918).............. $ 500 $ 499,918
------------
TOTAL INVESTMENTS--98.4%
(cost $13,527,099)..................... 14,626,322
Other assets less liabilities--1.6%........ 230,471
------------
NET ASSETS--100.0%......................... $ 14,856,793
============
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$799,819 or 5.4% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-22
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON AND
PREFERRED STOCKS--95.4%
BASIC INDUSTRIES--0.7%
CHEMICALS--0.5%
Grace (W.R.) & Co......................... 14,000 $ 724,500
------------
MINING & METALS--0.2%
Century Aluminum Co. ..................... 15,000 256,875
------------
981,375
------------
CAPITAL GOODS--0.6%
POLLUTION CONTROL--0.6%
WMX Technologies, Inc..................... 27,000 880,875
------------
CONSUMER SERVICES--14.7%
AIRLINES--2.0%
Continental Airlines, Inc.*............... 51,000 1,440,750
Delta Air Lines, Inc...................... 5,000 354,375
Northwest Airlines Corp. Cl.A*............ 13,200 516,450
UAL Corp.*................................ 7,000 437,500
------------
2,749,075
------------
BROADCASTING &
CABLE--3.3%
Argyle Television, Inc.*.................. 19,100 463,175
Comcast Corp. Cl.A........................ 51,000 908,438
Liberty Media Group Inc. Cl.A*............ 34,225 977,552
TCI Group Series A*....................... 159,300 2,080,856
TCI Satellite Entertainment, Inc.*........ 15,930 158,304
------------
4,588,325
------------
BUSINESS SERVICES--3.7%
ADT Ltd.*................................. 65,000 1,486,875
CUC International, Inc.*.................. 151,950 3,608,812
------------
5,095,687
------------
ENTERTAINMENT &
LEISURE--0.7%
ITT Corp.*................................ 24,200 1,049,675
------------
RESTAURANTS &
LODGING--0.4%
American General Hospitality Corp......... 21,000 498,750
------------
RETAILING--4.6%
AutoZone, Inc.*........................... 90,100 2,477,750
CompUSA, Inc.*............................ 85,900 1,771,687
Micro Warehouse, Inc.*.................... 21,700 252,263
Sears, Roebuck & Co....................... 13,000 599,625
Wal-Mart Stores, Inc...................... 57,000 1,303,875
------------
6,405,200
------------
20,386,712
------------
CONSUMER STAPLES--1.8%
TOBACCO--1.8%
Loews Corp................................ 25,800 $ 2,431,650
------------
ENERGY--2.9%
OIL & GAS SERVICES--2.9%
Gulf Canada Resources Ltd.*............... 359,000 2,647,625
Nabors Industries, Inc.*.................. 69,000 1,328,250
------------
3,975,875
------------
FINANCE--26.7%
BANKING & CREDIT--12.4%
American Express Co....................... 56,000 3,164,000
Chase Manhattan Corp...................... 30,320 2,706,060
First Chicago NBD Corp.................... 22,900 1,230,875
First Union Corp.......................... 33,000 2,442,000
Household International, Inc.............. 15,100 1,392,975
J.P. Morgan & Co., Inc.................... 1,900 185,487
MBNA Corp................................. 27,000 1,120,500
Mercury Finance Co........................ 211,000 2,584,750
NationsBank Corp.......................... 25,000 2,443,750
------------
17,270,397
------------
INSURANCE--8.1%
20th Century Industries, Inc.............. 58,000 978,750
Acceptance Insurance Co.*................. 114,000 2,251,500
American International Group, Inc......... 31,350 3,393,637
PMI Group, Inc............................ 3,300 182,738
Progressive Corp.......................... 16,600 1,118,425
Travelers Group, Inc...................... 71,666 3,251,845
------------
11,176,895
------------
REAL ESTATE--5.5%
Arden Realty Group, Inc................... 40,000 1,110,000
Castle & Cooke, Inc.*..................... 35,000 555,625
Humphrey Hospitality Trust, Inc........... 78,100 678,494
JP Realty, Inc............................ 38,000 983,250
Koger Equity, Inc......................... 100,000 1,875,000
Macerich Co............................... 52,500 1,371,562
Prentiss Properties Trust................. 29,000 725,000
Summit Properties, Inc.................... 15,000 331,875
------------
7,630,806
------------
OTHER--0.7%
Dean Witter, Discover & Co................ 15,300 1,013,625
------------
37,091,723
------------
B-23
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
HEALTH CARE--6.7%
BIOTECHNOLOGY--0.1%
Gensia, Inc. (a)*......................... 8,000 $ 147,016
------------
DRUGS--4.5%
Biogen, Inc.*............................. 21,000 811,125
Merck & Co., Inc.......................... 39,900 3,162,075
Pfizer, Inc............................... 20,000 1,657,500
Schering-Plough Corp...................... 9,000 582,750
------------
6,213,450
------------
MEDICAL PRODUCTS--0.3%
Boston Scientific Corp.*.................. 8,100 486,000
------------
MEDICAL SERVICES--1.8%
Medtronic, Inc............................ 20,600 1,400,800
Quest Medical, Inc.*...................... 38,000 299,250
Saint Jude Medical, Inc.*................. 17,900 762,988
------------
2,463,038
------------
9,309,504
------------
TECHNOLOGY--38.7%
COMMUNICATIONS
EQUIPMENT--4.1%
Anixter International, Inc.*.............. 30,000 483,750
EMC Corp.*................................ 70,000 2,318,750
Loral Space & Communications*............. 27,000 496,125
Millicom International Cellular, S.A.*.... 16,500 529,031
Teleport Communications Group, Inc.*...... 61,700 1,881,850
------------
5,709,506
------------
COMPUTER HARDWARE--0.8%
Compaq Computer Corp.*.................... 15,500 1,150,875
------------
COMPUTER PERIPHERALS--1.0%
Seagate Technology, Inc.*................. 36,000 1,422,000
------------
COMPUTER SOFTWARE &
SERVICES--10.1%
Cabletron Systems, Inc.*.................. 20,200 671,650
Ceridian Corp.*........................... 99,500 4,029,750
Electronic Data Systems Corp. ............ 40,000 1,730,000
Microsoft Corp.*.......................... 30,000 2,480,625
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
Oracle Corp.*............................. 1,800 $ 75,038
Sterling Commerce, Inc.*.................. 79,789 2,812,562
Sterling Software, Inc.*.................. 70,100 2,216,912
------------
14,016,537
------------
NETWORK SOFTWARE--8.4%
3Com Corp.*............................... 64,700 4,743,319
Cisco Systems, Inc.*...................... 108,000 6,878,250
------------
11,621,569
------------
SEMI-CONDUCTORS &
RELATED--5.2%
Cypress Semiconductor Corp.*.............. 40,000 565,000
Intel Corp................................ 51,000 6,677,812
------------
7,242,812
------------
TELECOMMUNICATIONS--9.1%
Colt Telecom Group Plc (ADR)*............. 85,000 1,646,875
Deutsche Telekom AG*...................... 41,800 851,675
Frontier Corp............................. 21,000 475,125
MFS Communications, Inc. * ............... 122,887 6,681,981
MFS Communications, Inc.
8.00% conv. pfd........................ 12,000 1,102,500
Telephone and Data Systems, Inc........... 42,900 1,555,125
U.S. Cellular Corp.*...................... 8,000 223,000
------------
12,536,281
------------
53,699,580
------------
TRANSPORTATION--2.6%
RAILROADS--2.6%
Canadian Pacific, Ltd..................... 116,000 3,074,000
Union Pacific Corp........................ 8,853 532,287
------------
3,606,287
------------
Total Common and Preferred Stocks
(cost $112,565,228).................... 132,363,581
------------
CONVERTIBLE BONDS--1.0%
3Com Corp.
10.25%, 11/01/01 (a)................... $ 400 887,000
Altera Corp.
5.75%, 6/15/02 (a)..................... 335 517,575
------------
Total Convertible Bonds
(cost $985,802)........................ 1,404,575
------------
B-24
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SHORT-TERM INVESTMENTS--4.3%
U.S. GOVERNMENT
OBLIGATIONS--4.3%
Federal Home Loan Mortgage Corp.
5.70%, 1/02/97
(amortized cost $5,899,066)............ $ 5,900 $ 5,899,066
------------
TOTAL INVESTMENTS--100.7%
(cost $119,450,096).................... $139,667,222
Other assets less liabilities--(0.7%)...... (979,331)
------------
NET ASSETS--100.0%......................... $138,687,891
============
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$1,551,591 or 1.1% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-25
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--83.5%
ARGENTINA--0.8%
Central Costanera................... 25,000 $ 76,515
Dycasa Dragados S.A................. 10,000 37,008
Metrogas S.A. (ADR)................. 3,000 28,125
------------
141,648
------------
AUSTRALIA--3.1%
CSL Ltd............................. 70,000 331,055
Qantas Airways Ltd.................. 51,867 86,576
TAB Corp. Holdings Ltd.............. 35,000 166,918
------------
584,549
------------
AUSTRIA--4.2%
Austria Mikro Systeme
International AG ................ 1,460 112,717
Bohler-Uddeholm..................... 1,000 71,571
Creditanstalt-Bankverein............ 2,000 135,384
Flughafen Wien AG................... 2,600 132,539
V.A. Stahl AG....................... 2,900 103,161
V.A. Technologies AG................ 1,450 227,573
------------
782,945
------------
BELGIUM--0.3%
Credit Communal de Belgique S.A.*... 600 54,747
------------
BRAZIL--7.8%
Bardella S.A........................ 500 47,633
Celgon Centrais Eletricas Goias
S.A. Series B pfd.* ............. 1,205,000 66,112
Centrais Elet Sta Catali*........... 121,501 113,421
Companhia Energetica de Sao
(ADR)*........................... 5,000 57,500
Companhia Paulista de Forca e Luz*.. 1,550,000 183,476
preferred rights, expiring 1/15/97* 6,101 0
Iven S.A.*.......................... 200,000 96,045
Light Participacoes S.A.*........... 500,000 121,259
Light Servicos de Eletricid S.A..... 500,000 177,557
Sider Nacional Cia.................. 1,480,000 42,017
Siderurgica Riograndense S.A........ 3,437,727 57,566
Telecomunicacoes Brasileras
S.A. (ADR) ...................... 3,900 300,262
Telecomunicacoes de
Sao Paulo S.A.*.................. 450,000 97,271
Vale Rio Doce Cia................... 5,360 103,166
------------
1,463,285
------------
CANADA--2.2%
Alberta Energy Ltd.................. 5,000 119,769
Canadian National Railway Co........ 3,100 117,800
Petro-Canada........................ 11,900 167,728
------------
405,297
------------
CHILE--0.4%
Compania de Telecomunicaciones
de Chile S.A. (ADR) ............. 400 $ 40,450
Enersis S.A. Sponsored (ADR)........ 1,000 27,750
------------
68,200
------------
COLUMBIA--0.2%
Banco de Columbia (GDR)............. 5,000 36,875
------------
CZECH REPUBLIC--1.1%
Ceske Radiokomunikace*.............. 350 49,044
CEZ (GDR)*.......................... 1,000 35,997
Komercni Banka A.S. (GDR)*.......... 1,500 39,900
Podnik Vypocetni Techniky*.......... 250 43,203
Tabak A.S.*......................... 150 37,780
------------
205,924
------------
DENMARK--0.3%
Kobenhavn Lufthave.................. 600 61,112
------------
EGYPT--0.3%
Commercial International
Bank (GDR)*...................... 3,600 49,860
------------
FINLAND--1.4%
Merita Ltd. Series A*............... 25,000 77,717
OY Tamro AB......................... 10,000 66,739
Valmet Co........................... 7,000 123,261
------------
267,717
------------
FRANCE--3.1%
Renault S.A......................... 4,000 85,959
Seita............................... 1,500 62,735
Soc Nacionale Elf Aquitaine S.A..... 1,500 136,542
Societe Centrale des Assurances
Generales de France ............. 1,750 56,495
Usinor Sacilor...................... 16,700 243,009
------------
584,740
------------
GERMANY--4.8%
Bankgesellschaft Berlin AG.......... 550 10,008
Deutsche Lufthansa AG............... 28,000 382,116
Deutsche Telekom AG*................ 14,080 296,917
Viag AG............................. 57 21,669
Viag AG (VAR)....................... 500 196,257
------------
906,967
------------
GHANA--0.3%
Ashanti Goldfields Co. Ltd. (GDR) .. 5,000 61,875
------------
GREECE--0.7%
Hellenic Sugar Industrie S.A........ 6,000 55,693
Hellenic Telecommunication
Organization S.A. ............... 5,000 85,424
------------
141,117
------------
B-26
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
HONG KONG--0.3%
Guangshen Railway Co. Ltd.
(ADR)*........................... 2,500 $ 51,563
------------
HUNGARY--1.8%
Mol Magyar Olaj Es Gazipari
Right (GDR) (a) ................. 9,000 111,600
OTP Bank (GDR)...................... 4,000 71,000
Tiszai Vegyi Kombinat Rt (GDR)*..... 9,000 100,800
Zalakeramia AG...................... 1,300 55,071
------------
338,471
------------
INDIA--0.6%
Industrial Credit & Investment Corp.
of India Ltd. (GDR)* (a) ........ 3,000 28,500
State Bank of India (GDR)*.......... 2,000 33,740
Steel Authority India (GDR)......... 6,000 54,600
------------
116,840
------------
INDONESIA--2.0%
Indosat............................. 70,000 192,634
PT Telekomunikasi Indonesia......... 22,000 37,955
PT Telekomunikasi Indonesia
(ADR)............................ 3,000 103,500
Tambang Timah (GDR)................. 2,000 35,200
------------
369,289
------------
IRELAND--0.9%
Greencore Group..................... 15,000 96,085
Irish Life Plc (Dublin Listing)..... 17,558 81,378
------------
177,463
------------
ISRAEL--0.6%
Bank Hapoalim B.M.*................. 38,000 60,227
Tadiran Ltd. (ADR).................. 2,000 56,250
------------
116,477
------------
ITALY--3.6%
Ente Nazionale Idrocarburi S.p.A.... 40,000 205,273
IMI LNV............................. 16,000 137,113
Instituto Nazionale delle
Assicurazioni ................... 70,000 91,180
Telecom Italia Mobile*.............. 25,000 63,200
Telecom Italia Mobile di Risp....... 50,000 97,561
Telecom Italia Mobile di Risp S.p.A. 55,000 78,494
------------
672,821
------------
JAPAN--2.3%
DDI Corp............................ 30 198,429
East Japan Railway Co............... 30 134,962
Japan Tobacco, Inc.................. 15 101,675
------------
435,066
------------
KOREA--2.9%
Korea Electric Power Corp. (ADR).... 4,000 $ 82,000
Korea Mobile Telecommunications
Corp. (ADR)* (a) ................ 36,359 468,122
------------
550,122
------------
MALAYSIA--0.4%
Petronas Gas Bhd.................... 20,000 83,152
------------
MEXICO--2.1%
ALFA S.A. de C.V.*.................. 25,000 116,552
Grupo Financiero Bancomer
S.A. de C.V. Series B Npv* ...... 200,000 80,030
Grupo Financiero Bancomer
S.A. de C.V. Series L Npv* ...... 1,315 443
Grupo Financiero Banorte*........... 55,000 54,497
Telefonos de Mexico S.A.
Series L (ADR) * ................ 4,500 148,500
------------
400,022
------------
NETHERLANDS--3.4%
Akzo Nobel N.V...................... 2,000 273,385
European Vinyls Corp.
International N.V. .............. 3,200 101,570
KLM Royal Dutch Airlines N.V........ 3,992 112,373
Koninkluke PTT Nederland N.V........ 4,000 152,679
------------
640,007
------------
NEW ZEALAND--2.2%
Telecom Corp. of New Zealand Ltd.... 18,000 91,877
Tranz Rail Holdings Ltd.*........... 36,500 221,916
Trustpower Ltd...................... 60,400 106,751
------------
420,544
------------
NORWAY--1.6%
Christiana Bank OG Kreditkasse...... 30,000 94,054
Den Norske Bank..................... 25,000 94,675
Norsk Hydro ASA..................... 2,000 107,091
------------
295,820
------------
PAKISTAN--0.4%
Hub Power Co. (GDR)*................ 2,000 38,500
Pakistan Telecom C (GDR)*........... 500 30,000
------------
68,500
------------
PERU--1.0%
Cementos Norte Pacasmay Series C.... 33,316 44,779
Cementos Norte Pacasmay Series I.... 20,000 28,183
Telefonica del Peru S.A............. 62,000 115,382
------------
188,344
------------
PHILIPPINES--2.5%
First Philippines Holdings Corp..... 59,000 134,601
B-27
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
WORLDWIDE PRIVATIZATION PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
International Container
Terminal Svc.* .................. 150,000 $ 78,422
Manila Electric Co.................. 32,000 261,597
------------
474,620
------------
POLAND--0.7%
Banka Przenyslowo Handlowy.......... 1,000 64,518
Elektrim S.A........................ 8,000 72,540
------------
137,058
------------
PORTUGAL--0.5%
Portugal Telecom S.A................ 3,000 85,521
------------
RUSSIA--2.5%
Gazprom (ADR)* (a).................. 6,000 106,500
RNGS Holdings Ltd., pfd.*........... 1,000 360,161
------------
466,661
------------
SOUTH AFRICA--0.5%
Iscor Ltd........................... 121,621 86,826
------------
SPAIN--2.8%
Argentaria S.A...................... 2,000 89,505
Emp Nac Electricid.................. 2,000 142,345
Empresa Nacional de Celulosas S.A... 7,000 83,844
Gas Natural SDG S.A................. 400 93,048
Repsol S.A.......................... 3,200 122,750
------------
531,492
------------
SWEDEN--0.5%
Sparbanken Sverige AB Cl.A (a)...... 5,000 85,778
------------
THAILAND--1.0%
Electricity Generating Public
of Thailand ..................... 10,000 27,294
Industrial Finance of Thailand...... 10,000 26,710
Industrial Finance of Thailand
(Foreign) ....................... 50,000 135,499
------------
189,503
------------
TURKEY--0.9%
Eregli Demirve Celik
Fabrikalari T.A.S. .............. 500,000 59,935
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
Petkim Petrokimya Holdings A.S...... 75,000 $ 30,083
Tupras Turkiye Petrol
Rafinerileri A.S.* .............. 150,000 37,344
Usas Ucak Servisi A.S............... 25,000 50,715
------------
178,077
------------
UNITED KINGDOM--11.4%
Anglian Water Plc................... 20,700 208,525
British Energy Plc.................. 223,000 557,786
East Midlands Electricity Plc....... 3,000 34,024
National Grid Group Plc............. 103,411 345,471
National Power Plc.................. 17,000 142,128
Northern Ireland Electricity Plc.... 17,000 110,091
Powergen Plc........................ 18,244 178,783
RJB Mining Plc...................... 6,000 43,871
Scottish Hydro Electric Plc......... 14,000 78,431
Stagecoach Holdings Plc............. 27,172 325,859
Wessex Water Plc.................... 17,333 110,466
------------
2,135,435
------------
UNITED STATES--3.1%
Central European Media
Enterprises Ltd.* ............... 2,000 63,000
Pharmacia & Upjohn, Inc............. 13,100 519,088
------------
582,088
------------
Total Common Stocks and
Other Investments
(cost $14,365,779)............... 15,694,418
------------
SHORT-TERM INVESTMENTS--14.1%
TIME DEPOSIT--14.1%
State Street Bank and Trust Co.
5.00%, 1/02/97
(amortized cost $2,652,000)...... $ 2,652 2,652,000
------------
TOTAL INVESTMENTS--97.6%
(cost $17,017,779)............... 18,346,418
Other assets less liabilities--2.4%. 460,395
------------
NET ASSETS--100.0%.................. $ 18,806,813
============
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$800,500 or 4.3% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-28
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--29.7%
BASIC INDUSTRIES--1.0%
CHEMICALS--0.6%
Akzo Nobel N.V............................ 300 $ 41,008
Bayer AG.................................. 700 28,568
Cytec Industries, Inc.*................... 250 10,156
Freeport McMoran, Inc..................... 900 28,912
Monsanto Co............................... 800 31,100
Olin Corp................................. 100 3,763
------------
143,507
------------
CONTAINERS--0.2%
Crown Cork & Seal, Inc.
4.5% conv. pfd........................ 800 43,500
------------
METALS & MINING--0.2%
Reynolds Metals Co........................ 625 35,234
------------
PAPER & FOREST
PRODUCTS--0.0%
Louisiana-Pacific Corp. .................. 300 6,338
------------
228,579
------------
CAPITAL GOODS--2.2%
ELECTRICAL EQUIPMENT--1.0%
General Electric Co....................... 1,000 98,875
Hitachi Ltd............................... 5,000 46,628
Matsushita Electric Industrial Co., Ltd... 2,000 32,640
Sharp Corp................................ 1,000 14,248
Sumitomo Electric Industries.............. 1,000 13,988
------------
206,379
------------
ENGINEERING &
CONSTRUCTION--0.3%
American Standard Cos., Inc.*............. 600 22,950
Bouygues.................................. 4 415
Martin Marietta Materials, Inc............ 200 4,650
Matsushita Electric Works................. 1,000 8,609
National House Industrial Co.............. 1,000 13,297
Uralita S.A............................... 600 4,691
------------
54,612
------------
MACHINERY--0.4%
Allied-Signal, Inc........................ 1,200 80,400
Coltec Industries, Inc.*.................. 600 11,325
------------
91,725
------------
POLLUTION CONTROL--0.5%
Republic Industries, Inc.*................ 350 10,916
USA Waste Services, Inc.*................. 1,800 $ 57,375
WMX Technologies, Inc. ................... 1,500 48,937
------------
117,228
------------
469,944
------------
CONSUMER
MANUFACTURING--0.5%
AUTO & RELATED--0.2%
Bajaj Auto Ltd. (GDR) (a)................. 200 6,650
Magneti Marelli S.p.A. ................... 11,700 14,538
Toyota Corp............................... 1,000 28,754
------------
49,942
------------
OTHER--0.3%
Fuji Photo Film........................... 1,000 32,985
Shimano, Inc.............................. 1,000 17,011
------------
49,996
------------
99,938
------------
CONSUMER SERVICES--4.0%
AIRLINES--0.2%
Deutsche Lufthansa AG..................... 1,200 16,376
Northwest Airlines Corp. Cl.A*............ 700 27,388
------------
43,764
------------
APPAREL--0.1%
Cone Mills Corp.*......................... 1,500 11,812
------------
BROADCASTING &
CABLE--0.6%
Cablevision Systems Corp. Cl.A*........... 700 21,437
Indonesian Satellite Corp. (ADR).......... 500 13,688
Liberty Media Group, Inc. Cl.A*........... 200 5,713
Reuters Holdings Plc...................... 2,000 25,715
Societe Television Francaise.............. 330 31,547
Viacom, Inc. Cl.B*........................ 1,005 35,049
------------
133,149
------------
ENTERTAINMENT &
LEISURE--0.6%
Carnival Corp. Cl.A....................... 100 3,300
ITT Corp.*................................ 400 17,350
Resorts World Bhd......................... 3,000 13,661
Time Warner, Inc.......................... 600 22,500
Walt Disney Co............................ 1,170 81,461
------------
138,272
------------
PRINTING & PUBLISHING--0.2%
New York Times Co. Cl.A................... 1,300 49,400
------------
B-29
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
RESTAURANTS &
LODGING--0.5%
Brinker International, Inc.*.............. 2,050 $ 32,800
Host Marriott Corp.*...................... 2,000 32,000
La Quinta Inns, Inc....................... 1,800 34,425
------------
99,225
------------
RETAILING--1.8%
AutoZone, Inc.*........................... 3,100 85,250
CompUSA, Inc.*............................ 2,800 57,750
Dayton Hudson Corp........................ 1,200 47,100
Federated Department Stores, Inc.*........ 1,000 34,125
Fingerhut Cos., Inc....................... 1,400 17,150
Hornbach Holding AG pfd................... 400 28,594
PT Ramayana Lestari Sentosa*.............. 500 1,079
Reebok International Ltd.................. 1,975 82,950
Sears Plc................................. 16,000 25,767
Woolworths Ltd............................ 8,000 19,267
------------
399,032
------------
874,654
------------
CONSUMER STAPLES--3.7%
BEVERAGES--0.4%
Cadbury Schweppes Plc..................... 3,000 25,338
Grand Metropolitan Plc.................... 3,500 27,463
Kirin Brewery Co., Ltd.................... 4,000 39,375
------------
92,176
------------
COSMETICS--0.6%
Colgate-Palmolive Co...................... 625 57,656
Gillette Co............................... 695 54,036
Shiseido Co., Ltd......................... 2,000 23,142
------------
134,834
------------
FOOD--1.0%
Campbell Soup Co.......................... 700 56,175
Coca-Cola Co.............................. 1,100 57,888
Ezaki Glico Co............................ 2,000 17,270
Nabisco Holdings Corp. Cl.A............... 1,325 51,509
Nestle S.A................................ 26 27,913
------------
210,755
------------
HOUSEHOLD PRODUCTS--0.5%
First Brands Corp......................... 750 21,281
Sunbeam Corp.............................. 3,700 95,275
------------
116,556
------------
RETAIL - FOOD--0.2%
Tesco Plc................................. 7,400 44,879
------------
TOBACCO--1.0%
B.A.T. Industries Plc..................... 3,000 $ 24,876
Loews Corp................................ 200 18,850
Philip Morris Cos., Inc................... 1,290 145,286
PT Hanjaya Mandala Sampoerna ............. 3,000 16,004
------------
205,016
------------
804,216
------------
ENERGY--2.8%
DOMESTIC INTEGRATED--0.5%
Exxon Corp................................ 1,100 107,800
------------
OIL & GAS SERVICES--2.3%
Apache Corp............................... 1,100 38,912
Baker Hughes, Inc......................... 1,600 55,200
BJ Services Co.*.......................... 1,600 81,600
Halliburton Co............................ 350 21,088
Louisiana Land & Exploration Co........... 700 37,538
Nabors Industries, Inc.*.................. 2,200 42,350
Noble Drilling Corp.*..................... 800 15,900
Schlumberger Ltd.......................... 650 64,919
Total S.A. Cl.B........................... 206 16,755
Transocean Offshore, Inc.................. 900 56,362
Union Pacific Corp........................ 800 48,100
Union Pacific Resources Group, Inc........ 677 19,802
------------
498,526
------------
606,326
------------
FINANCE--4.6%
BANKING & CREDIT--1.8%
American Express Co....................... 1,600 90,400
Bangkok Bank Public Co., Ltd.............. 700 6,769
Bank of Tokyo - Mitsubishi, Ltd........... 1,000 18,565
Beneficial Corp........................... 250 15,844
BG Bank A/S............................... 300 14,056
Compagnie de Suez S.A.*................... 200 8,504
Dao Heng Bank Group Ltd................... 3,000 14,390
Deutsche Bank AG.......................... 700 32,707
First Union Corp.......................... 1,300 96,200
MBNA Corp................................. 1,900 78,850
Sakura Bank Ltd........................... 2,000 14,299
Sparbanken Sverige AB A Shares ........... 500 8,578
------------
399,162
------------
BROKERAGE & MONEY
MANAGEMENT--0.5%
Merrill Lynch & Co., Inc.................. 800 65,200
Nomura Securities Co., Ltd................ 2,000 30,049
------------
95,249
------------
B-30
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
INSURANCE--1.6%
General Accident Plc...................... 2,000 $ 26,178
Internationale Nederlanden Groep N.V.*.... 1,062 38,260
Istituto Nazionale delle Assicurazioni.... 16,000 20,841
ITT Hartford Group, Inc................... 100 6,750
MGIC Investment Corp...................... 300 22,800
Penncorp Financial Group, Inc............. 1,100 39,600
PMI Group, Inc............................ 100 5,538
TIG Holdings, Inc......................... 1,000 33,875
Tokio Marine and Fire Co., Ltd.*.......... 2,000 18,824
Travelers Group, Inc...................... 2,700 122,512
United Assurance Group Plc*............... 1,300 10,690
Scrip*................................. 3,900 0
Zurich Versicherungsgesellschaft.......... 30 8,338
------------
354,206
------------
REAL ESTATE--0.1%
Daito Trust Construction.................. 2,400 26,733
------------
OTHER--0.6%
Associates First Capital Corp.*........... 1,000 44,125
Dean Witter, Discover & Co................ 1,300 86,125
------------
130,250
------------
1,005,600
------------
HEALTH CARE--3.7%
BIOTECHNOLOGY--0.3%
Centocor, Inc.*........................... 1,643 58,840
------------
DRUGS--2.2%
Amgen, Inc.*.............................. 800 43,550
Biogen, Inc.*............................. 1,501 57,976
GelTex Pharmaceuticals, Inc.*............. 200 4,800
Merck & Co., Inc.......................... 1,100 87,175
Novartis AG *............................. 21 24,432
Orion-Yhtymne OY Cl.B..................... 200 7,696
Pfizer, Inc............................... 1,000 82,875
Smithkline Beecham Plc.................... 2,330 48,501
Taisho Pharmaceutical Co.................. 1,000 23,573
UniChem Plc............................... 5,000 21,029
Warner-Lambert Co......................... 400 30,000
Yamanouchi Pharmaceutical................. 2,000 41,102
------------
472,709
------------
MEDICAL PRODUCTS--0.3%
Fresenius Medical Care AG*................ 250 21,396
Medtronic, Inc............................ 760 51,680
------------
73,076
------------
MEDICAL SERVICES--0.9%
Columbia/HCA Healthcare Corp.............. 2,000 $ 81,500
Oxford Health Plans, Inc.*................ 900 52,706
Pacificare Health Systems, Inc.*.......... 300 25,538
Steris Corp.*............................. 868 37,812
------------
197,556
------------
802,181
------------
MULTI INDUSTRY--0.6%
Berjaya Sports Toto Bhd................... 2,000 9,978
BTR Plc................................... 3,598 17,568
Compagnie Generale des Eaux............... 203 25,157
Swire Pacific Ltd. Cl.A................... 1,000 9,535
U.S. Industries, Inc.*.................... 1,700 58,438
------------
120,676
------------
TECHNOLOGY--5.6%
AEROSPACE & DEFENSE--0.3%
Boeing Co................................. 400 42,550
United Technologies Corp.................. 400 26,400
------------
68,950
------------
COMMUNICATIONS
EQUIPMENT--0.3%
Nokia Corp. (ADR)......................... 400 23,050
Scientific-Atlanta, Inc................... 1,500 22,500
Vanguard Cellular Systems, Inc.*.......... 1,000 15,625
------------
61,175
------------
COMPUTER HARDWARE--0.2%
Compaq Computer Corp.*.................... 600 44,550
------------
COMPUTER PERIPHERALS--0.1%
Seagate Technology, Inc.*................. 700 27,650
------------
COMPUTER SOFTWARE &
SERVICES--1.8%
Ceridian Corp.*........................... 1,000 40,500
Electronic Data Systems Corp. ............ 550 23,787
First Data Corp........................... 1,000 36,500
Informix Corp.*........................... 3,400 69,487
Intergraph Corp.*......................... 1,500 15,563
Microsoft Corp.*.......................... 600 49,612
Netscape Communications Corp.*............ 600 34,125
Oracle Corp.*............................. 1,712 71,369
Sterling Commerce, Inc.*.................. 477 16,814
Sterling Software, Inc.*.................. 300 9,488
Storage Technology Corp.*................. 200 9,525
The Learning Co., Inc.*................... 500 7,188
------------
383,958
------------
B-31
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
NETWORK SOFTWARE--1.1%
3Com Corp.*............................... 1,600 $ 117,300
Cisco Systems, Inc.*...................... 1,900 121,006
------------
238,306
------------
OFFICE EQUIPMENT &
SERVICES--0.2%
Canon, Inc................................ 2,000 44,210
------------
SEMI-CONDUCTORS &
RELATED--0.8%
Altera Corp.*............................. 1,050 76,322
Intel Corp................................ 500 65,469
National Semiconductor Corp.*............. 500 12,187
Teradyne, Inc.*........................... 500 12,188
Texas Instruments, Inc.................... 100 6,375
------------
172,541
------------
TELECOMMUNICATIONS--0.8%
Asia Satellite Telecom Ltd.*.............. 8,000 18,566
British Telecommunications Plc............ 3,000 20,302
Deutsche Telekom AG*...................... 1,000 20,375
Frontier Corp............................. 600 13,575
Korea Mobile Telecommunications
Corp. (ADR) (a)........................ 2,575 33,153
MFS Communications, Inc.*................. 400 21,750
Telecom Corp. of New Zealand Ltd.......... 3,000 15,313
Telephone and Data Systems, Inc........... 700 25,375
WorldCom, Inc.* (a)....................... 400 10,425
------------
178,834
------------
1,220,174
------------
TRANSPORTATION--0.5%
RAILROADS--0.5%
Burlington Northern Santa Fe.............. 400 34,550
Canadian Pacific, Ltd..................... 2,700 71,550
------------
106,100
------------
TRUCKING--0.0%
Nippon Express Co., Ltd................... 2,000 13,712
------------
119,812
------------
UTILITIES--0.5%
ELECTRIC & GAS--0.5%
CINergy Corp.............................. 500 16,688
FPL Group, Inc............................ 800 36,800
Hong Kong and China Gas Co., Ltd.
warrants, expiring 9/30/97 *........... 500 278
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
Tokyo Electric Power Co................... 1,000 $ 21,932
Veba AG................................... 400 23,135
------------
98,833
------------
Total Common Stocks and
Other Investments
(cost $5,798,773)...................... 6,450,933
------------
CORPORATE BONDS--11.5%
Bear Stearns Cos., Inc.
6.75%, 5/01/01......................... $ 200 200,474
Chase Manhattan Corp.
6.25%, 1/15/06......................... 200 189,418
Deutsche Bank Financial, Inc.
6.70%, 12/13/06........................ 350 343,525
John Hancock Mutual Life
Insurance Co.
7.375%, 2/15/24 (a).................... 300 289,161
RAS Laffan Liquefied Natural Gas
8.294%, 9/15/14 (a).................... 350 357,000
St. George Bank Ltd.
7.15%, 10/15/05 (a).................... 425 424,328
Time Warner, Inc.
9.15%, 2/01/23......................... 315 341,457
Zions Institutional Capital Trust A
8.536%, 12/15/26 (a)................... 350 360,626
------------
Total Corporate Bonds
(cost $2,475,064)...................... 2,505,989
------------
U.S. GOVERNMENT
OBLIGATIONS--38.2%
Federal Home Loan Bank
7.00%, 9/01/11......................... 483 483,142
Federal National Mortgage Association
6.00%, 4/01/11......................... 483 464,685
6.50%, 6/01/11......................... 338 332,198
7.00%, 5/01/26......................... 608 594,550
U.S. Treasury Bond
6.50%, 11/15/26........................ 190 186,468
U.S. Treasury Notes
5.75%, 10/31/00........................ 1,440 1,420,877
5.75%, 8/15/03......................... 895 868,150
6.25%, 10/31/01........................ 610 610,573
6.375%, 5/15/99........................ 2,795 2,819,009
6.50%, 8/15/05......................... 145 145,929
7.75%, 12/31/99........................ 355 371,309
------------
B-32
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
CONSERVATIVE INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
Total U.S. Government Obligations
(cost $8,281,724)...................... $ 8,296,890
------------
YANKEE--1.8%
Province of Quebec
7.125%, 2/09/24
(cost $358,282)........................ $ 400 383,016
------------
SHORT-TERM INVESTMENTS--17.9%
U.S. GOVERNMENT
OBLIGATIONS--17.9%
Federal Home Loan Mortgage Corp.
5.70%, 1/02/97
(amortized cost $3,899,383)............ 3,900 3,899,383
------------
TOTAL INVESTMENTS--99.1%
(cost $20,813,226)..................... $ 21,536,211
Other assets less liabilities--0.9%........ 192,982
------------
NET ASSETS--100.0%......................... $ 21,729,193
============
DISTRIBUTION OF INVESTMENTS BY GLOBAL REGION
AS A PERCENT OF TOTAL INVESTMENTS
Canada.................................... 2.1%
Japan..................................... 2.5
New Zealand and Australia................. 0.2
Scandinavia............................... 0.2
Southeast Asia............................ 0.4
United Kingdom............................ 1.4
United States**........................... 90.9
Other European Countries.................. 2.3
--------
100.0%
========
** Includes Short-Term Investments of 18.1%.
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$1,481,343 or 6.8% of net assets.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-33
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--75.0%
BASIC INDUSTRIES--3.3%
CHEMICALS--2.6%
Akzo Nobel N.V........................... 400 $ 54,677
Bayer AG.................................. 1,100 44,892
Cytec Industries, Inc.*................... 800 32,500
Freeport McMoran, Inc..................... 1,500 48,187
Monsanto Co............................... 2,000 77,750
Olin Corp................................. 500 18,813
------------
276,819
------------
CONTAINERS--0.4%
Crown Cork & Seal, Inc.
4.5% conv. pfd......................... 800 43,500
------------
METALS & MINING--0.3%
Reynolds Metals Co........................ 535 30,161
------------
350,480
------------
CAPITAL GOODS--5.7%
ELECTRICAL EQUIPMENT--1.9%
General Electric Co....................... 900 88,988
Hitachi Ltd............................... 6,000 55,954
Matsushita Electrical Industrial Co., Ltd. 2,000 32,640
Sharp Corp................................ 1,000 14,247
Sumitomo Electric Industries.............. 1,000 13,988
------------
205,817
------------
ENGINEERING &
CONSTRUCTION--1.0%
American Standard Cos., Inc.*............. 1,600 61,200
Bouygues.................................. 8 829
Martin Marietta Materials, Inc............ 500 11,625
Matsushita Electric Works................. 1,000 8,609
National House Industrial Co.............. 2,000 26,595
Uralita S.A............................... 600 4,691
------------
113,549
------------
MACHINERY--1.1%
Allied-Signal, Inc........................ 1,200 80,400
Coltec Industries, Inc.*.................. 2,000 37,750
------------
118,150
------------
POLLUTION CONTROL--1.7%
Republic Industries, Inc.*................ 850 26,509
USA Waste Services, Inc.*................. 1,700 54,188
WMX Technologies, Inc..................... 3,000 97,875
------------
178,572
------------
616,088
------------
CONSUMER
MANUFACTURING--1.2%
AUTO & RELATED--0.7%
Bajaj Auto Ltd. (GDR)* (a)................ 300 $ 9,975
Magneti Marelli S.p.A. ................... 9,700 12,053
Toyota Corp............................... 2,000 57,508
------------
79,536
------------
OTHER--0.5%
Fuji Photo Film........................... 1,000 32,985
Shimano, Inc.............................. 1,000 17,011
------------
49,996
------------
129,532
------------
CONSUMER SERVICES--10.0%
AIRLINES--1.0%
Delta Air Lines, Inc...................... 700 49,612
Deutsche Lufthansa AG..................... 1,800 24,565
Northwest Airlines Corp. Cl.A*............ 700 27,388
------------
101,565
------------
APPAREL--0.2%
Cone Mills Corp.*......................... 3,000 23,625
------------
BROADCASTING &
CABLE--1.7%
Cablevision Systems Corp. Cl.A*........... 1,250 38,281
Indonesian Satellite Corp. (ADR) ......... 1,000 27,375
Liberty Media Group Cl.A*................. 200 5,713
Reuters Holdings Plc...................... 3,000 38,573
Societe Television Francaise.............. 300 28,679
TCI Group Series A*....................... 1,000 13,062
Viacom, Inc. Cl.B*........................ 1,014 35,363
------------
187,046
------------
ENTERTAINMENT &
LEISURE--1.9%
Carnival Corp. Cl.A....................... 100 3,300
ITT Corp.*................................ 1,100 47,712
Resorts World Bhd......................... 6,000 27,321
Time Warner, Inc.......................... 1,500 56,250
Walt Disney Co............................ 966 67,258
------------
201,841
------------
PRINTING & PUBLISHING--0.4%
New York Times Co. Cl.A................... 1,000 38,000
------------
RESTAURANTS &
LODGING--1.1%
Brinker International, Inc.*.............. 2,000 32,000
Host Marriott Corp.*...................... 3,700 59,200
B-34
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
La Quinta Inns, Inc....................... 1,600 $ 30,600
------------
121,800
------------
RETAILING--3.7%
AutoZone, Inc.*........................... 3,100 85,250
CompUSA, Inc.*............................ 2,800 57,750
Dayton Hudson Corp........................ 900 35,325
Federated Department Stores, Inc.*........ 900 30,713
Fingerhut Cos., Inc....................... 3,000 36,750
Hornbach Holding AG pfd................... 550 39,316
PT Ramayana Lestari Sentosa*.............. 500 1,080
Reebok International Ltd.................. 1,670 70,140
Sears Plc................................. 14,600 23,512
Woolworths Ltd............................ 8,000 19,267
------------
399,103
------------
1,072,980
------------
CONSUMER STAPLES--7.4%
BEVERAGES--0.8%
Cadbury Schweppes Plc..................... 3,000 25,338
Grand Metropolitan Plc.................... 3,500 27,463
Kirin Brewery Co., Ltd.................... 3,000 29,531
------------
82,332
------------
COSMETICS--1.3%
Colgate-Palmolive Co...................... 560 51,660
Gillette Co............................... 645 50,149
Shiseido Co., Ltd......................... 3,000 34,712
------------
136,521
------------
FOOD--2.3%
Campbell Soup Co.......................... 790 63,398
Coca-Cola Co.............................. 1,200 63,150
Ezaki Glico Co............................ 4,000 34,539
Nabisco Holdings Corp. Cl.A............... 1,045 40,624
Nestle S.A................................ 40 42,944
------------
244,655
------------
HOUSEHOLD PRODUCTS--0.8%
Sunbeam Corp.............................. 3,500 90,125
------------
RETAIL - FOOD--0.3%
Tesco Plc................................. 5,600 33,962
------------
TOBACCO--1.9%
B.A.T. Industries Plc..................... 3,200 26,534
Loews Corp................................ 500 47,125
Philip Morris Cos., Inc................... 1,050 118,256
PT Hanjaya Mandala Sampoerna ............. 3,000 16,004
------------
207,919
------------
795,514
------------
ENERGY--8.4%
DOMESTIC INTEGRATED--0.8%
Exxon Corp................................ 900 $ 88,200
------------
INTERNATIONAL--0.1%
Tatneft (ADR)* (a)........................ 100 4,600
------------
OIL & GAS SERVICES--7.5%
Apache Corp............................... 2,500 88,437
Baker Hughes, Inc......................... 4,400 151,800
BJ Services Co.*.......................... 2,100 107,100
Halliburton Co............................ 700 42,175
Louisiana Land & Exploration Co........... 1,500 80,437
Nabors Industries, Inc.*.................. 2,900 55,825
Noble Drilling Corp.*..................... 3,000 59,625
Schlumberger Ltd.......................... 800 79,900
Total S.A. Cl.B........................... 508 41,318
Transocean Offshore, Inc.................. 1,350 84,544
Union Pacific Resources Group, Inc........ 508 14,859
------------
806,020
------------
898,820
------------
FINANCE--11.7%
BANKING & CREDIT--4.0%
American Express Co....................... 2,000 113,000
Bangkok Bank Public Co., Ltd.............. 1,000 9,670
Bank of Tokyo - Mitsubishi, Ltd........... 1,000 18,565
BG Bank A/S............................... 300 14,056
Compagnie de Suez S.A.*................... 400 17,007
Dao Heng Bank Group Ltd................... 3,000 14,390
Deutsche Bank AG.......................... 300 14,017
First Union Corp.......................... 1,300 96,200
MBNA Corp................................. 1,800 74,700
Overseas Chinese Bank..................... 1,100 13,678
Sakura Bank Ltd........................... 3,000 21,449
Sparbanken Sverige AB A Shares............ 1,000 17,156
------------
423,888
------------
BROKERAGE & MONEY
MANAGEMENT--0.9%
Merrill Lynch & Co., Inc.................. 700 57,050
Nomura Securities Co., Ltd................ 3,000 45,074
------------
102,124
------------
INSURANCE--4.9%
General Accident Plc...................... 2,000 26,178
Internationale Nederlanden Groep N.V.*.... 1,510 54,400
Istituto Nazionale delle Assicurazioni.... 14,000 18,236
B-35
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
Life Re Corp.............................. 1,500 $ 57,937
MGIC Investment Corp...................... 950 72,200
Penncorp Financial Group, Inc............. 1,100 39,600
PMI Group, Inc............................ 100 5,538
TIG Holdings, Inc......................... 2,000 67,750
Tokio Marine and Fire Co. Ltd.*........... 3,000 28,236
Travelers Group, Inc...................... 2,333 105,860
United Assurance Group Plc*............... 3,000 24,670
Scrip*................................. 9,000 0
Zurich Versicherungsgesellschaft.......... 80 22,234
------------
522,839
------------
REAL ESTATE--0.5%
Beneficial Corp........................... 500 31,688
Daito Trust Construction.................. 2,400 26,733
------------
58,421
------------
OTHER--1.4%
Associates First Capital Corp.*........... 1,500 66,187
Dean Witter, Discover & Co................ 1,200 79,500
------------
145,687
------------
1,252,959
------------
HEALTH CARE--7.7%
BIOTECHNOLOGY--0.4%
Centocor, Inc.*........................... 1,330 47,631
------------
DRUGS--5.1%
Amgen, Inc.*.............................. 690 37,562
Biogen, Inc.*............................. 1,980 76,477
GelTex Pharmaceuticals, Inc.*............. 200 4,800
Merck & Co., Inc. ........................ 1,080 85,590
Novartis AG*.............................. 21 24,432
Orion-Yhtymne OY Cl.B..................... 500 19,239
Pfizer, Inc............................... 900 74,588
Smithkline Beecham Plc.................... 2,019 27,948
Taisho Pharmaceutical Co.................. 2,000 47,146
UniChem Plc............................... 1,500 6,309
Warner-Lambert Co......................... 1,300 97,500
Yamanouchi Pharmaceutical................. 2,000 41,102
------------
542,693
------------
MEDICAL PRODUCTS--0.7%
Fresenius Medical Care AG*................ 250 21,396
Medtronic, Inc............................ 750 51,000
------------
72,396
------------
MEDICAL SERVICES--1.5%
Columbia/HCA Healthcare Corp.............. 1,800 73,350
Oxford Health Plans, Inc.*................ 600 $ 35,138
Pacificare Health Systems, Inc.*.......... 200 17,025
Steris Corp.*............................. 790 34,414
------------
159,927
------------
822,647
------------
MULTI INDUSTRY--2.1%
Berjaya Sports Toto Bhd................... 3,000 14,967
BTR Plc................................... 4,346 21,220
Compagnie Generale des Eaux............... 254 31,478
Hutchison Whampoa Ltd..................... 1,000 7,855
Swire Pacific Ltd. Cl.A................... 1,000 9,535
U.S. Industries, Inc.*.................... 4,000 137,500
------------
222,555
------------
TECHNOLOGY--15.3%
AEROSPACE & DEFENSE--0.8%
Boeing Co................................. 550 58,506
United Technologies Corp.................. 400 26,400
------------
84,906
------------
COMMUNICATIONS
EQUIPMENT--1.6%
Nokia Corp. (ADR)......................... 1,500 86,437
Scientific-Atlanta, Inc................... 2,600 39,000
Vanguard Cellular Systems, Inc.*.......... 3,000 46,875
------------
172,312
------------
COMPUTER HARDWARE--0.5%
Compaq Computer Corp.*.................... 630 46,778
------------
COMPUTER PERIPHERALS--0.6%
Seagate Technology, Inc.*................. 1,700 67,150
------------
COMPUTER SOFTWARE &
SERVICES--4.8%
Ceridian Corp.*........................... 2,500 101,250
Electronic Data Systems Corp. ............ 550 23,787
First Data Corp........................... 850 31,025
Informix Corp.*........................... 5,150 105,253
Intergraph Corp.*......................... 2,000 20,750
Microsoft Corp.*.......................... 500 41,344
Netscape Communications Corp.*............ 600 34,125
Oracle Corp.*............................. 2,062 85,960
Sterling Commerce, Inc.*.................. 716 25,239
Sterling Software, Inc.*.................. 450 14,231
Storage Technology Corp.*................. 500 23,812
The Learning Co., Inc.*................... 250 3,594
------------
510,370
------------
B-36
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
NETWORK SOFTWARE--2.4%
3Com Corp.*............................... 1,475 $ 108,136
Cisco Systems, Inc.*...................... 2,250 143,297
------------
251,433
------------
OFFICE EQUIPMENT &
SERVICES--0.6%
Canon, Inc................................ 3,000 66,316
------------
SEMI-CONDUCTORS &
RELATED--1.6%
Altera Corp.*............................. 1,000 72,687
Intel Corp................................ 400 52,375
National Semiconductor Corp.*............. 1,000 24,375
Teradyne, Inc.*........................... 500 12,188
Texas Instruments, Inc.................... 200 12,750
------------
174,375
------------
TELECOMMUNICATIONS--2.4%
Asia Satellite Telecom Ltd.*.............. 6,000 13,925
British Telecommunications Plc............ 3,600 24,362
Deutsche Telekom AG*...................... 2,000 40,750
DSC Communications Corp.*................. 1,500 26,906
Frontier Corp............................. 1,200 27,150
Korea Mobile Telecommunications
Corp. (ADR) (a)........................ 2,060 26,522
MFS Communications, Inc.*................. 1,000 54,375
Telecom Corp. of New Zealand Ltd.......... 3,000 15,313
WorldCom, Inc.* (a)....................... 1,200 31,275
------------
260,578
------------
1,634,218
------------
TRANSPORTATION--1.3%
RAILROADS--1.1%
Burlington Northern Santa Fe.............. 400 34,550
Canadian Pacific Ltd...................... 2,000 53,000
Union Pacific Corp........................ 600 36,075
------------
123,625
------------
TRUCKING--0.2%
Nippon Express Co., Ltd................... 3,000 20,568
------------
144,193
------------
UTILITIES--0.9%
ELECTRIC & GAS--0.9%
CINergy Corp.............................. 300 10,013
FPL Group, Inc............................ 600 27,600
Hong Kong & China Gas Co., Ltd.
warrants, expiring 9/30/97 *........... 600 $ 334
Tokyo Electric Power Co................... 1,000 21,932
Veba AG................................... 600 34,702
------------
94,581
------------
Total Common Stocks and
Other Investments
(cost $7,313,939)...................... 8,034,567
------------
CORPORATE BONDS--6.3%
Alaska Steel Corp.
9.125%, 12/15/06 (a)................... $ 50 51,500
Auburn Hills Trust
12.00%, 5/01/20 ....................... 50 75,797
Calenergy, Inc.
9.50%, 9/15/06......................... 35 36,138
Chase Manhattan Corp.
6.25%, 1/15/06......................... 100 94,709
Deutsche Bank Financial, Inc.
6.70%, 12/13/06........................ 75 73,612
RAS Laffan Liquefied Natural Gas
8.294%, 9/15/14 (a).................... 95 96,900
Reliance Industries Ltd.
10.50%, 8/06/46 (a).................... 50 51,753
Republic of Poland
4.00%, 10/27/14 (b).................... 75 63,656
Time Warner, Inc.
9.15%, 2/01/23......................... 60 65,039
USX Corp.
9.125%, 1/15/13........................ 60 68,496
------------
Total Corporate Bonds
(cost $667,479)........................ 677,600
------------
U.S. GOVERNMENT
OBLIGATIONS--13.5%
Federal Home Loan Bank
7.00%, 9/01/11......................... 82 82,134
Federal National Mortgage Association
6.00%, 4/01/11......................... 97 92,937
6.50%, 12/01/10........................ 65 63,800
7.00%, 12/01/11........................ 50 49,936
7.00%, 5/01/26......................... 83 80,859
B-37
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
GROWTH INVESTORS PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
U.S. Treasury Notes
5.75%, 8/15/03......................... $ 445 $ 431,650
6.25%, 10/31/01........................ 15 15,014
6.375%, 5/15/99........................ 625 630,369
------------
Total U.S. Government Obligations
(cost $1,436,392)...................... 1,446,699
------------
SHORT-TERM INVESTMENTS--4.7%
U.S. GOVERNMENT
OBLIGATIONS--4.7%
Federal Home Loan Mortgage Corp.
5.70%, 1/02/97
(amortized cost $499,921).............. 500 499,921
------------
TOTAL INVESTMENTS--99.5%
(cost $9,917,731)...................... $ 10,658,787
Other assets less liabilities--0.5%........ 50,549
------------
NET ASSETS--100.0%......................... $ 10,709,336
============
DISTRIBUTION OF INVESTMENTS BY GLOBAL REGION
AS A PERCENT OF TOTAL INVESTMENTS
Canada.................................... 0.5%
Japan..................................... 6.5
New Zealand and Australia................. 0.3
Scandinavia............................... 1.3
Southeast Asia............................ 1.6
United Kingdom............................ 2.9
United States**........................... 80.6
Other European Countries.................. 6.3
--------
100.0%
========
** Includes Short-Term Investments of 4.7%.
- -------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration normally applied to certain qualified buyers. At December
31, 1996, the aggregate market value of these securities amounted to
$272,525 or 2.5% of net assets.
(b) Coupon will increase periodically based upon a predetermined schedule.
Stated interest rate in effect at December 31, 1996.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-38
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS--70.8%
BUSINESS SERVICES--1.0%
Abacus Direct Corp.*...................... 400 $ 7,550
CUC International, Inc.*.................. 9,500 225,625
Ingram Micro, Inc. Cl.A*.................. 2,400 55,200
------------
288,375
------------
COMMUNICATIONS
EQUIPMENT--7.3%
DSP Communications, Inc.*................. 13,200 254,925
Ericsson (L.M.) Telephone Co. (ADR)....... 14,700 443,756
Gandalf Technologies, Inc.*............... 2,600 9,019
General Instrument Corp.*................. 5,000 108,125
Glenayre Technologies, Inc.*.............. 17,000 366,563
Nokia Corp. (ADR)*........................ 6,500 374,562
PairGain Technologies, Inc.*.............. 8,000 243,500
Picturetel Corp.*......................... 2,500 64,688
Scientific-Atlanta, Inc.*................. 12,400 186,000
------------
2,051,138
------------
COMPUTER HARDWARE--7.4%
Compaq Computer Corp.*.................... 12,100 898,425
Dell Computer Corp.*...................... 18,925 1,006,573
Sun Microsystems, Inc.*................... 7,000 179,813
------------
2,084,811
------------
COMPUTER PERIPHERALS--3.8%
Seagate Technology, Inc.*................. 15,800 624,100
Storm Technology, Inc.*................... 600 2,925
Stormedia, Inc.*.......................... 3,900 63,131
Western Digital Corp.*.................... 6,700 381,063
------------
1,071,219
------------
COMPUTER SOFTWARE &
SERVICES--21.1%
Affiliated Computer Services, Inc.*....... 6,400 188,000
Applix, Inc.*............................. 6,800 147,475
Computer Sciences Corp.*.................. 2,800 229,950
DST Systems, Inc.*........................ 4,000 125,500
Electronic Data Systems Corp. ............ 11,000 475,750
Farallon Communications, Inc. ............ 14,000 88,375
First Data Corp........................... 17,200 627,800
Forte Software, Inc.*..................... 4,600 150,363
Gartner Group, Inc. Cl.A*................. 8,400 327,075
HBO & Co.................................. 4,500 267,187
I2 Technologies, Inc.*.................... 2,000 77,250
Informix Corp.*........................... 22,400 457,800
Integrated Systems, Inc. Cl.A*............ 5,400 $ 139,050
Macromedia, Inc.*......................... 5,000 90,625
Maxis, Inc.*.............................. 200 2,425
Microsoft Corp.*.......................... 3,000 248,063
Netscape Communications Corp.*............ 9,500 540,312
Object Design, Inc.*...................... 3,900 45,094
Oracle Corp.*............................. 20,950 873,353
Pegasystems, Inc.*........................ 3,000 90,375
Puma Technology, Inc.*.................... 1,000 17,000
Rational Software Corp.*.................. 11,000 435,187
Renaissance Solutions, Inc.*.............. 5,200 235,950
Software 2000, Inc.*...................... 7,000 57,313
Spectrum Holobyte, Inc.*.................. 800 6,050
------------
5,943,322
------------
NETWORK SOFTWARE--13.5%
3Com Corp.*............................... 13,400 982,387
Ascend Communications, Inc.*.............. 8,400 521,850
Cabletron Systems, Inc.*.................. 11,400 379,050
Cascade Communications Corp.*............. 6,900 381,225
Cisco Systems, Inc.*...................... 16,800 1,069,950
Fore Systems, Inc.*....................... 10,500 345,844
Shiva Corp.*.............................. 3,000 104,250
------------
3,784,556
------------
SEMI-CONDUCTORS &
RELATED--11.9%
Altera Corp.*............................. 7,000 508,812
Applied Materials, Inc.*.................. 9,200 330,625
Atmel Corp.*.............................. 15,000 498,750
Intel Corp. .............................. 6,680 874,662
Lam Research Corp.*....................... 7,000 196,875
LSI Logic Corp.*.......................... 8,700 232,725
Microchip Technology, Inc.*............... 8,700 442,613
Teradyne, Inc.*........................... 10,400 253,500
------------
3,338,562
------------
TELECOMMUNICATIONS--0.8%
MFS Communications, Inc.*................. 4,000 217,500
------------
OTHER--4.0%
Sanmina Corp.*............................ 11,200 632,800
Solectron Corp.*.......................... 9,000 480,375
------------
1,113,175
------------
Total Common Stocks
(cost $17,832,864)..................... 19,892,658
------------
B-39
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
TECHNOLOGY PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
SHORT-TERM INVESTMENTS--28.1%
COMMERCIAL PAPER--15.3%
American Express Credit Corp.
5.75%, 1/06/97......................... $ 1,300 $ 1,298,962
Ford Motor Credit Corp.
6.00%, 1/07/97......................... 1,215 1,213,785
Merrill Lynch & Co., Inc.
5.65%, 1/10/97......................... 775 773,905
Prudential Funding
5.60%, 1/08/97 ....................... 1,000 998,911
------------
4,285,563
------------
U.S. GOVERNMENT
OBLIGATIONS--12.8%
Federal Home Loan Bank
5.42%, 1/16/97......................... 1,600 1,596,387
Federal National Mortgage Association
5.50%, 1/08/97......................... 2,000 1,997,861
------------
3,594,248
------------
Total Short-Term Investments
(amortized cost $7,879,811)............ 7,879,811
------------
TOTAL INVESTMENTS--98.9%
(cost $25,712,675)..................... $ 27,772,469
Other assets less liabilities--1.1%........ 310,962
------------
NET ASSETS--100.0%......................... $ 28,083,431
============
- -------------------------------------------------------------------------------
* Non-income producing security.
See Glossary of Terms on page B-43.
See Notes to Financial Statements.
B-40
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
COMMON STOCKS AND
OTHER INVESTMENTS--82.6%
BASIC INDUSTRIES--9.3%
CHEMICALS--3.7%
Crompton & Knowles Corp................... 6,500 $ 125,125
Cytec Industries, Inc.*................... 3,200 130,000
International Specialty Products, Inc..... 6,000 73,500
------------
328,625
------------
METALS & MINING--4.8%
AK Steel Holding Corp. ................... 2,700 106,988
Century Aluminum Co. ..................... 6,200 106,175
Steel Dynamics, Inc.*..................... 6,200 117,412
Titanium Metals Corp.*.................... 2,500 81,875
Uranium Resources, Inc.*.................. 1,200 9,300
------------
421,750
------------
PAPER & FOREST
PRODUCTS--0.8%
Buckeye Cellulose Corp.*.................. 2,700 71,887
------------
822,262
------------
CAPITAL GOODS--4.2%
ENGINEERING &
CONSTRUCTION--0.4%
EMCOR Group, Inc.*........................ 2,700 35,437
------------
POLLUTION CONTROL--2.4%
American Disposal Services, Inc.*......... 2,700 48,938
Culligan Water Technologies, Inc.......... 1,600 64,800
United Waste Systems, Inc.*............... 2,900 99,506
------------
213,244
------------
OTHER--1.4%
Hexcel Corp.*............................. 7,600 123,500
------------
372,181
------------
CONSUMER
MANUFACTURING--3.7%
AUTO & RELATED--0.4%
Miller Industries, Inc.*.................. 1,950 39,000
------------
TEXTILE PRODUCTS--3.3%
Mohawk Industries, Inc. .................. 6,600 146,850
Polymer Group, Inc.*...................... 5,600 77,700
Unifi, Inc................................ 2,100 67,463
------------
292,013
------------
331,013
------------
CONSUMER SERVICES--23.3%
ADVERTISING--3.7%
HA-LO Industries, Inc.*................... 3,375 $ 93,024
Outdoor Systems, Inc.*.................... 2,550 72,356
TeleSpectrum Worldwide, Inc.*............. 10,300 162,225
------------
327,605
------------
AIRLINES--3.1%
Alaska Air Group, Inc.*................... 3,500 73,500
America West Airlines, Inc.*.............. 6,000 95,250
Continental Airlines, Inc.*............... 3,700 104,525
------------
273,275
------------
APPAREL--2.5%
Jones Apparel Group, Inc.*................ 2,100 78,487
Timberland Co.*........................... 1,200 45,600
Tommy Hilfiger Corp.*..................... 2,000 96,000
------------
220,087
------------
BROADCASTING &
CABLE--2.0%
Evergreen Media Corp.*.................... 4,900 121,887
ICG Communications, Inc.*................. 3,300 58,163
------------
180,050
------------
RESTAURANTS &
LODGING--4.2%
Extended Stay America, Inc.*.............. 2,800 56,350
Interstate Hotels Co.*.................... 5,350 151,137
Studio Plus Hotels, Inc.*................. 5,900 93,663
Suburban Lodges of America, Inc.*......... 4,400 69,025
------------
370,175
------------
RETAILING--6.8%
Industrie Natuzzi S.p.A. (ADR)*........... 4,400 101,200
Marker International*..................... 1,600 8,900
Nine West Group, Inc.*.................... 5,000 231,875
Team Rental Group, Inc.*.................. 11,400 185,250
Ugly Duckling Corp.*...................... 4,000 77,500
------------
604,725
------------
MISCELLANEOUS--1.0%
Superior Services, Inc.*.................. 4,300 87,075
------------
2,062,992
------------
ENERGY--9.1%
OIL & GAS SERVICES--7.4%
Costilla Energy, Inc...................... 7,200 96,750
KCS Energy, Inc........................... 1,800 64,350
Parker Drilling Co........................ 15,700 151,113
B-41
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES U.S. $ VALUE
------ ------------
Rowan Cos., Inc.*......................... 7,700 $ 174,212
Ultramar Diamond Shamrock Corp............ 5,354 169,320
------------
655,745
------------
PIPELINES--1.7%
Valero Energy Corp........................ 5,300 151,713
------------
807,458
------------
FINANCE--4.6%
BANKING & CREDIT--2.2%
Aames Financial Corp...................... 2,300 82,513
Oxford Resources Corp.*................... 3,500 107,406
------------
189,919
------------
INSURANCE--0.4%
ReliaStar Financial Corp.................. 600 34,650
------------
REAL ESTATE--1.0%
Taubman Centers, Inc...................... 7,000 90,125
------------
OTHER--1.0%
International Alliance Services,
Inc.*.................................. 400 4,800
International Alliance Services,
Inc.*+................................. 9,700 87,300
------------
92,100
------------
406,794
------------
HEALTH CARE--5.0%
BIOTECHNOLOGY--1.3%
Centocor, Inc.*........................... 3,200 114,600
------------
DRUGS--2.1%
Algos Pharmaceutical Corp.*............... 200 2,237
GelTex Pharmaceuticals, Inc.*............. 5,600 134,400
MedImmune, Inc.*.......................... 2,700 46,575
------------
183,212
------------
MEDICAL SERVICES--1.6%
National Surgery Centers, Inc.*........... 3,700 139,675
------------
437,487
------------
TECHNOLOGY--19.9%
COMMUNICATIONS
EQUIPMENT--2.8%
DSP Communications, Inc.*................. 3,150 60,834
Millicom International Cellular, S.A.*.... 2,900 92,981
Premisys Communications, Inc.*............ 1,400 47,250
TCSI Corp.*............................... 700 $ 4,419
Westell Technologies, Inc. Cl.A*.......... 1,800 40,950
------------
246,434
------------
COMPUTER PERIPHERALS--3.5%
HMT Technology Corp.*..................... 4,900 74,113
Lexmark International Group, Inc.*........ 2,200 60,775
Read-Rite Corp.*.......................... 3,800 95,475
Xircom, Inc.*............................. 3,400 74,375
------------
304,738
------------
COMPUTER SOFTWARE &
SERVICES--5.5%
Applix, Inc.*............................. 2,700 58,556
Comverse Technology, Inc.*................ 3,100 117,219
Credit Management Solutions, Inc.*........ 3,200 45,200
DST Systems, Inc.*........................ 1,200 37,650
Exabyte Corp.*............................ 4,000 53,750
Infinity Financial Technology, Inc.*...... 900 15,300
Structural Dynamics Research Corp.*....... 3,500 69,344
Systemsoft Corp.*......................... 2,200 32,450
Uniphase Corp.*........................... 1,100 57,887
------------
487,356
------------
ELECTRONICS--4.0%
BMC Industries, Inc....................... 2,100 66,150
Cable Design Technologies Corp.*.......... 2,100 64,969
Harman International Industries, Inc...... 2,800 155,750
Kent Electronics Corp.*................... 2,600 66,950
------------
353,819
------------
NETWORK SOFTWARE--1.3%
IDT Corp.*................................ 4,000 44,250
Network General Corp.*.................... 2,400 72,450
------------
116,700
------------
TELECOMMUNICATIONS--2.8%
Telephone and Data Systems, Inc........... 5,200 188,500
U.S. Cellular Corp.*...................... 2,200 61,325
------------
249,825
------------
1,758,872
------------
TRANSPORTATION--3.5%
RAILROADS--0.4%
Genesee & Wyoming, Inc. Cl.A*............. 900 30,375
------------
SHIPPING--2.2%
OMI Corp.*................................ 22,100 193,375
------------
B-42
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
QUASAR PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONT'D)
- -------------------------------------------------------------------------------
SHARES OR
PRINCIPAL
AMOUNT
(000) U.S. $ VALUE
--------- ------------
TRUCKING--0.9%
Xtra Corp................................. 1,900 $ 82,413
------------
306,163
------------
Total Common Stocks and
Other Investments
(cost $7,157,081)...................... 7,305,222
------------
SHORT-TERM INVESTMENTS--13.6%
U.S. GOVERNMENT
OBLIGATIONS--13.6%
Federal Home Loan Mortgage Corp.
5.70%, 1/02/97
(amortized cost $1,199,810)............ $ 1,200 1,199,810
------------
TOTAL INVESTMENTS--96.2%
(cost $8,356,891)...................... $ 8,505,032
Other assets less liabilities--3.8%....... 336,785
------------
NET ASSETS--100.0%........................ $ 8,841,817
============
- -------------------------------------------------------------------------------
* Non-income producing security.
+ Illiquid security. The security has been valued at fair value in
accordance with the procedures described in Note A. This security was
acquired on December 26, 1996 at a cost of $87,300.
See Notes to Financial Statements.
GLOSSARY OF TERMS
ADR - American Depository Receipts
FRN - Floating Rate Note
GDR - Global Depository Receipts
IDU - Interest Due on Unpaid Bond
IRB - Industrial Revenue Bond
ORD - Ordinary
pfd. - Preferred Stock
B-43
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREMIER GLOBAL GROWTH AND SHORT-TERM
GROWTH BOND INCOME MULTI-MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
ASSETS --------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Investments in securities, at value (cost $78,612,333,
$17,078,982, $113,632,820 and $6,928,674,
respectively).............................................. $ 96,055,825 $ 17,256,550 $ 126,364,134 $ 6,930,193
Cash, at value (cost $3,737, $516,443, $61,147
and $547, respectively).................................... 3,737 516,698 61,147 547
Receivable for capital stock sold............................. 333,094 -0- 200,930 -0-
Dividends receivable.......................................... 154,586 -0- 307,462 -0-
Deferred organization expenses................................ 2,657 -0- -0- -0-
Interest receivable........................................... -0- 410,081 -0- 158,906
Unrealized appreciation of forward exchange
currency contracts......................................... -0- 22,695 -0- 56,830
-------------- ------------- -------------- --------------
Total assets.................................................. 96,549,899 18,206,024 126,933,673 7,146,476
-------------- ------------- -------------- --------------
LIABILITIES
Investment advisory fee payable............................... 60,698 9,930 65,165 1,778
Payable for capital stock redeemed............................ 19 54,712 64,721 15,350
Accrued expenses.............................................. 54,874 24,292 74,382 17,044
-------------- ------------- -------------- --------------
Total liabilities............................................. 115,591 88,934 204,268 34,172
-------------- ------------- -------------- --------------
NET ASSETS....................................................... $ 96,434,308 $ 18,117,090 $ 126,729,405 $ 7,112,304
============== ============= ============== ==============
COMPOSITION OF NET ASSETS
Capital stock, at par......................................... $ 6,144 $ 1,543 $ 7,727 $ 663
Additional paid-in capital.................................... 79,608,642 16,799,530 103,571,697 7,805,104
Undistributed net investment income........................... 323,427 920,567 1,269,248 346,901
Accumulated net realized gain (loss) on investments,
options and foreign currency transactions.................. (947,397) 199,223 9,149,428 (1,097,934)
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities........ 17,443,492 196,227 12,731,305 57,570
-------------- ------------- -------------- --------------
$ 96,434,308 $ 18,117,090 $ 126,729,405 $ 7,112,304
============== ============= ============== ==============
Shares of capital stock outstanding........................... 6,143,896 1,542,961 7,727,283 662,827
============== ============= ============== ==============
Net asset value per share..................................... $ 15.70 $ 11.74 $ 16.40 $ 10.73
========= ======== ========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/
HIGH GRADE TOTAL MONEY
SECURITIES RETURN INTERNATIONAL MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------- ------------- --------------
ASSETS
<S> <C> <C> <C> <C>
Investments in securities, at value (cost $28,701,259,
$23,976,844, $42,799,658 and $64,186,996,
respectively)............................................ $ 28,791,704 $ 25,731,347 $ 44,224,641 $ 64,186,996
Cash, at value (cost $185, $587, $153,392
and $253,962, respectively).............................. 185 587 152,129 253,962
Interest receivable......................................... 386,158 157,364 549 -0-
Unrealized appreciation of forward exchange
currency contracts....................................... 12,334 -0- -0- -0-
Deferred organization expenses.............................. 3,464 4,826 4,941 4,969
Receivable for capital stock sold........................... 3,007 12,407 15,932 610,012
Dividends receivable........................................ 1,181 36,993 76,124 -0-
Receivable for investment securities sold................... -0- 11,145 25,229 -0-
-------------- ------------- ------------- --------------
Total assets................................................ 29,198,033 25,954,669 44,499,545 65,055,939
-------------- ------------- ------------- --------------
LIABILITIES
Investment advisory fee payable............................. 14,705 13,462 27,019 26,042
Payable for capital stock redeemed.......................... 5,292 15,084 2,408 196,380
Payable for investment securities purchased................. -0- -0- 65,866 -0-
Accrued expenses............................................ 28,132 50,773 80,156 64,226
-------------- ------------- ------------- --------------
Total liabilities........................................... 48,129 79,319 175,449 286,648
-------------- ------------- ------------- --------------
NET ASSETS..................................................... $ 29,149,904 $ 25,875,350 $ 44,324,096 $ 64,769,291
============== ============= ============= ==============
COMPOSITION OF NET ASSETS
Capital stock, at par....................................... $ 2,531 $ 1,769 $ 2,977 $ 64,769
Additional paid-in capital.................................. 27,619,078 22,618,278 41,658,294 64,703,819
Undistributed net investment income......................... 1,370,536 481,043 462,109 1,046
Accumulated net realized gain (loss) on investments
and foreign currency transactions........................ 54,933 1,019,757 776,481 (343)
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities...... 102,826 1,754,503 1,424,235 -0-
-------------- ------------- ------------- --------------
$ 29,149,904 $ 25,875,350 $ 44,324,096 $ 64,769,291
============== -============ ============= ==============
Shares of capital stock outstanding......................... 2,531,426 1,768,899 2,976,776 64,769,391
============== ============= ============= ==============
Net asset value per share................................... $ 11.52 $ 14.63 $ 14.89 $ 1.00
========= ======== ========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICAN
GLOBAL DOLLAR GOVERNMENT UTILITY
GOVERNMENT INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost $8,152,185,
$15,384,697 and $13,527,099, respectively).......... $ 8,543,372 $ 16,521,272 $ 14,626,322
Cash, at value (cost $964, $13,242 and $106,107,
respectively)....................................... 964 13,223 106,107
Receivable for investment securities sold.............. 918,435 -0- 75,137
Interest receivable.................................... 117,739 144,517 6,970
Deferred organization expenses......................... 7,792 10,058 7,196
Receivable for capital stock sold...................... 5,137 11,729 13,749
Unrealized appreciation of forward exchange
currency contracts.................................. -0- 20,647 -0-
Dividends receivable................................... -0- -0- 51,568
-------------- -------------- --------------
Total assets........................................... 9,593,439 16,721,446 14,887,049
-------------- -------------- --------------
LIABILITIES
Payable for investment securities purchased............ 727,562 -0- -0-
Investment advisory fee payable........................ 1,812 5,852 5,648
Payable for capital stock redeemed..................... 879 133 669
Accrued expenses....................................... 15,780 19,811 23,939
-------------- -------------- --------------
Total liabilities...................................... 746,033 25,796 30,256
-------------- -------------- --------------
NET ASSETS................................................ $ 8,847,406 $ 16,695,650 $ 14,856,793
============== ============== ==============
COMPOSITION OF NET ASSETS
Capital stock, at par.................................. $ 618 $ 1,349 $ 1,170
Additional paid-in capital............................. 7,231,488 14,461,883 13,513,780
Undistributed net investment income.................... 482,953 1,077,786 289,028
Accumulated net realized gain (loss) on investments,
options and foreign currency transactions........... 741,160 (2,290) (46,408)
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities. 391,187 1,156,922 1,099,223
-------------- -------------- --------------
$ 8,847,406 $ 16,695,650 $ 14,856,793
============== ============== ==============
Shares of capital stock outstanding.................... 617,736 1,349,031 1,170,361
============== ============== ==============
Net asset value per share.............................. $ 14.32 $ 12.38 $ 12.69
========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE
GROWTH PRIVATIZATION INVESTORS
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost $119,450,096,
$17,017,779 and $20,813,226, respectively)............... $ 139,667,222 $ 18,346,418 $ 21,536,211
Cash, at value (cost $197,953, $387,664 and $18,644,
respectively)............................................ 197,953 392,376 18,644
Receivable for capital stock sold........................... 316,940 25,787 59,684
Dividends receivable........................................ 108,708 48,137 8,278
Interest receivable......................................... 7,689 368 128,056
Deferred organization expenses.............................. 5,402 5,446 5,638
Receivable for investment securities sold................... -0- 13,519 9,295
Receivable from investment adviser.......................... -0- 2,734 -0-
-------------- -------------- --------------
Total assets................................................ 140,303,914 18,834,785 21,765,806
-------------- -------------- --------------
LIABILITIES
Payable for investment securities purchased................. 1,447,797 -0- 2,988
Investment advisory fee payable............................. 85,331 -0- 5,151
Payable for capital stock redeemed.......................... 1,055 73 400
Accrued expenses............................................ 81,840 27,899 28,074
-------------- -------------- --------------
Total liabilities........................................... 1,616,023 27,972 36,613
-------------- -------------- --------------
NET ASSETS..................................................... $ 138,687,891 $ 18,806,813 $ 21,729,193
============== ============== ==============
COMPOSITION OF NET ASSETS
Capital stock, at par....................................... $ 7,740 $ 1,433 $ 1,800
Additional paid-in capital.................................. 111,715,564 16,748,156 20,449,061
Undistributed net investment income......................... 262,537 308,447 607,910
Accumulated net realized gain (loss) on investments
and foreign currency transactions........................ 6,484,948 415,378 (52,673)
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities...... 20,217,102 1,333,399 723,095
-------------- -------------- --------------
$ 138,687,891 $ 18,806,813 $ 21,729,193
============== ============== ==============
Shares of capital stock outstanding......................... 7,739,999 1,432,879 1,800,117
============== ============== ==============
Net asset value per share................................... $ 17.92 $ 13.13 $ 12.07
========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
INVESTORS TECHNOLOGY QUASAR
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (cost $9,917,731,
$25,712,675 and $8,356,891, respectively)............... $ 10,658,787 $ 27,772,469 $ 8,505,032
Cash, at value (cost $3,321, $138,541 and $192,214,
respectively)........................................... 3,321 138,541 192,214
Interest receivable........................................ 30,107 -0- -0-
Receivable for capital stock sold.......................... 21,815 177,379 162,383
Receivable for investment securities sold.................. 10,320 7,868 12,051
Dividends receivable....................................... 8,473 459 1,628
Deferred organization expenses............................. 5,638 17,475 23,983
Receivable from investment adviser......................... 69 -0- 7,830
-------------- -------------- --------------
Total assets............................................... 10,738,530 28,114,191 8,905,121
-------------- -------------- --------------
LIABILITIES
Payable for investment securities purchased................ 2,987 -0- 48,421
Payable for capital stock redeemed......................... 641 1,687 121
Investment advisory fee payable............................ -0- 8,620 -0-
Accrued expenses........................................... 25,566 20,453 14,762
-------------- -------------- --------------
Total liabilities.......................................... 29,194 30,760 63,304
-------------- -------------- --------------
NET ASSETS.................................................... $ 10,709,336 $ 28,083,431 $ 8,841,817
============== ============== ==============
COMPOSITION OF NET ASSETS
Capital stock, at par...................................... $ 840 $ 2,543 $ 831
Additional paid-in capital................................. 9,614,233 26,233,295 8,656,353
Undistributed net investment income........................ 177,700 142,959 11,162
Accumulated net realized gain (loss) on investments
and foreign currency transactions....................... 175,410 (355,160) 25,330
Net unrealized appreciation of investments and
foreign currency denominated assets and liabilities..... 741,153 2,059,794 148,141
-------------- -------------- --------------
$ 10,709,336 $ 28,083,431 $ 8,841,817
============== ============== ==============
Shares of capital stock outstanding........................ 840,388 2,543,479 830,749
============== ============== ==============
Net asset value per share.................................. $ 12.74 $ 11.04 $ 10.64
========= ========= =========
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREMIER GLOBAL GROWTH AND SHORT-TERM
GROWTH BOND INCOME MULTI-MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax withheld of $5,630, $-0-,
$6,610 and $-0-, respectively)........................... $ 799,656 $ -0- $ 1,662,492 $ -0-
Interest.................................................... 117,231 1,004,520 278,686 356,592
-------------- ------------- ------------- --------------
Total investment income..................................... 916,887 1,004,520 1,941,178 356,592
-------------- ------------- ------------- --------------
EXPENSES
Investment advisory fee..................................... 624,414 97,431 506,294 28,116
Custodian................................................... 61,136 59,597 57,228 58,371
Audit and legal............................................. 48,619 6,941 64,854 5,972
Printing.................................................... 21,755 1,408 32,031 12,803
Amortization of organization expenses....................... 5,512 2,136 658 -0-
Transfer agency............................................. 1,170 1,284 1,242 1,201
Directors fees.............................................. 525 1,396 1,325 575
Miscellaneous............................................... 5,061 1,685 1,834 -0-
-------------- ------------- ------------- --------------
Total expenses.............................................. 768,192 171,878 665,466 107,038
Less: expense reimbursement................................. (174,999) (30,455) (1,981) (58,473)
-------------- ------------- ------------- --------------
Net expenses................................................ 593,193 141,423 663,485 48,565
-------------- ------------- ------------- --------------
Net investment income....................................... 323,694 863,097 1,277,693 308,027
-------------- ------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on investment transactions......... (442,478) 269,212 9,399,724 12,232
Net realized gain on foreign currency transactions.......... -0- 7,112 536 36,126
Net change in unrealized appreciation (depreciation)
of investments........................................... 14,126,172 (129,817) 8,264,456 4,612
Net change in unrealized appreciation (depreciation) of
foreign currency denominated assets and liabilities...... -0- 3,920 (506) 102,656
-------------- ------------- ------------- --------------
Net gain on investments..................................... 13,683,694 150,427 17,664,210 155,626
-------------- ------------- ------------- --------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $ 14,007,388 $ 1,013,524 $ 18,941,903 $ 463,653
============== ============= ============= ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-49
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/
HIGH GRADE TOTAL MONEY
SECURITIES RETURN INTERNATIONAL MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 1,644,239 $ 440,995 $ 156,513 $ 2,685,518
Dividends (net of foreign tax withheld of $-0-, $113,
$91,426 and $-0-, respectively).......................... 4,725 204,786 529,146 -0-
-------------- ------------- ------------- --------------
Total investment income..................................... 1,648,964 645,781 685,659 2,685,518
-------------- ------------- ------------- --------------
EXPENSES
Investment advisory fee..................................... 145,707 108,845 305,459 251,755
Custodian................................................... 57,707 59,387 234,630 45,667
Audit and legal............................................. 13,371 10,445 20,222 29,336
Printing.................................................... 10,360 7,657 12,906 13,127
Amortization of organization expenses....................... 4,886 4,886 5,007 5,007
Transfer agency............................................. 1,219 1,217 1,282 1,290
Directors fees.............................................. 1,022 1,397 375 375
Miscellaneous............................................... 2,753 1,994 3,177 3,229
-------------- ------------- ------------- --------------
Total expenses.............................................. 237,025 195,828 583,058 349,786
Less: expense reimbursement................................. (13,684) (30,782) (292,872) (1,152)
-------------- ------------- ------------- --------------
Net expenses................................................ 223,341 165,046 290,186 348,634
-------------- ------------- ------------- --------------
Net investment income....................................... 1,425,623 480,735 395,473 2,336,884
-------------- ------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on investment transactions......... 48,507 1,019,837 841,241 (343)
Net realized gain (loss) on foreign currency transactions... (53,678) -0- 65,399 -0-
Net change in unrealized appreciation (depreciation)
of investments........................................... (503,717) 1,338,504 694,273 -0-
Net change in unrealized appreciation (depreciation)
of foreign currency denominated assets and liabilities... 25,755 -0- (10,027) -0-
-------------- ------------- ------------- --------------
Net gain (loss) on investments.............................. (483,133) 2,358,341 1,590,886 (343)
-------------- ------------- ------------- --------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $ 942,490 $ 2,839,076 $ 1,986,359 $ 2,336,541
============== ============= ============= ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NORTH AMERICAN
GLOBAL DOLLAR GOVERNMENT UTILITY
GOVERNMENT INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest.................................................... $ 535,472 $ 1,350,439 $ 68,250
Dividends (net of foreign tax withheld of $-0-, $-0-
and $2,608, respectively)................................ -0- -0- 329,669
-------------- -------------- --------------
Total investment income..................................... 535,472 1,350,439 397,919
-------------- -------------- --------------
EXPENSES
Investment advisory fee..................................... 42,385 73,221 83,839
Custodian................................................... 52,552 59,618 57,709
Printing.................................................... 8,699 13,329 15,004
Amortization of organization expenses....................... 3,352 4,326 3,067
Audit and legal............................................. 1,621 4,725 6,072
Transfer agency............................................. 1,281 1,323 1,218
Directors fees.............................................. 575 375 1,375
Miscellaneous............................................... 721 2,055 320
-------------- -------------- --------------
Total expenses.............................................. 111,186 158,972 168,604
Less: expense reimbursement................................. (57,498) (51,957) (62,408)
-------------- -------------- --------------
Net expenses................................................ 53,688 107,015 106,196
-------------- -------------- --------------
Net investment income....................................... 481,784 1,243,424 291,723
-------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on investment transactions......... 745,244 821 (29,624)
Net realized loss on foreign currency transactions.......... -0- (166,651) (1,398)
Net change in unrealized appreciation of investments........ 126,646 818,764 796,030
Net change in unrealized appreciation of foreign
currency denominated assets and liabilities.............. -0- 22,444 -0-
-------------- -------------- --------------
Net gain on investments..................................... 871,890 675,378 765,008
-------------- -------------- --------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $ 1,353,674 $ 1,918,802 $ 1,056,731
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE CONSERVATIVE
GROWTH PRIVATIZATION INVESTORS
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (net of foreign tax withheld of $3,860,
$37,193 and $3,771, respectively)......................... $ 843,192 $ 280,347 $ 63,935
Interest..................................................... 289,632 89,157 695,363
-------------- -------------- --------------
Total investment income...................................... 1,132,824 369,504 759,298
-------------- -------------- --------------
EXPENSES
Investment advisory fee...................................... 664,973 115,208 116,656
Audit and legal.............................................. 69,493 7,199 9,834
Custodian.................................................... 65,511 83,679 81,801
Printing..................................................... 23,273 1,872 2,987
Amortization of organization expenses........................ 2,006 2,006 2,006
Directors fees............................................... 1,400 1,375 575
Transfer agency.............................................. 426 1,328 1,941
Miscellaneous................................................ 1,685 831 1,842
-------------- -------------- --------------
Total expenses............................................... 828,767 213,498 217,642
Less: expense reimbursement.................................. (8,160) (104,050) (69,878)
-------------- -------------- --------------
Net expenses................................................. 820,607 109,448 147,764
-------------- -------------- --------------
Net investment income........................................ 312,217 260,056 611,534
-------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on investment transactions.......... 6,453,535 526,159 (51,567)
Net realized gain (loss) on foreign currency transactions.... 944 (18,329) (4,003)
Net change in unrealized appreciation of investments......... 16,515,830 1,112,767 466,136
Net change in unrealized appreciation (depreciation)
of foreign currency denominated assets and liabilities.... (153) 4,812 110
-------------- -------------- --------------
Net gain on investments...................................... 22,970,156 1,625,409 410,676
-------------- -------------- --------------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................... $ 23,282,373 $ 1,885,465 $ 1,022,210
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
INVESTORS TECHNOLOGY QUASAR
PORTFOLIO PORTFOLIO(A) PORTFOLIO(B)
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest................................................. $ 183,154 $ 252,088 $ 19,631
Dividends (net of foreign tax withheld of $4,626,
$31 and $-0-, respectively)........................... 78,863 7,327 2,906
-------------- -------------- --------------
Total investment income.................................. 262,017 259,415 22,537
-------------- -------------- --------------
EXPENSES
Investment advisory fee.................................. 66,395 122,595 11,973
Custodian................................................ 84,355 52,187 34,848
Printing................................................. 3,936 2,949 244
Audit and legal.......................................... 2,895 13,685 2,134
Amortization of organization expenses.................... 2,006 4,025 2,115
Transfer agency.......................................... 1,366 1,109 441
Directors fees........................................... 1,352 1,375 643
Miscellaneous............................................ 1,861 918 792
-------------- -------------- --------------
Total expenses........................................... 164,166 198,843 53,190
Less: expense reimbursement.............................. (80,065) (82,377) (41,815)
-------------- -------------- --------------
Net expenses............................................. 84,101 116,466 11,375
-------------- -------------- --------------
Net investment income.................................... 177,916 142,949 11,162
-------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on investment transactions...... 175,910 (355,160) 25,330
Net realized loss on foreign currency transactions....... (570) -0- -0-
Net change in unrealized appreciation of investments..... 507,571 2,059,794 148,141
Net change in unrealized appreciation of foreign
currency denominated assets and liabilities........... 97 -0- -0-
-------------- -------------- --------------
Net gain on investments.................................. 683,008 1,704,634 173,471
-------------- -------------- --------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 860,924 $ 1,847,583 $ 184,633
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
(a) Commencement of operations, January 11, 1996.
(b) Commencement of operations, August 5, 1996.
See Notes to Financial Statements.
B-53
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO GLOBAL BOND PORTFOLIO
-------------------------------- ------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 323,694 $ 313,463 $ 863,097 $ 565,830
Net realized gain (loss) on investment
transactions..................................... (442,478) 16,824,672 269,212 445,890
Net realized gain on foreign currency
transactions..................................... -0- -0- 7,112 466,026
Net change in unrealized appreciation (depreciation)
of investments and foreign currency denominated
assets and liabilities........................... 14,126,172 3,054,025 (125,897) 446,385
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 14,007,388 20,192,160 1,013,524 1,924,131
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (316,135) (97,581) (1,035,617) (72,090)
Net realized gain on investments.................... (17,322,907) (273,977) (309,324) -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease)............................. 70,787,668 (28,211,402) 6,895,530 2,402,867
------------- -------------- -------------- --------------
Total increase (decrease)........................... 67,156,014 (8,390,800) 6,564,113 4,254,908
NET ASSETS
Beginning of period................................. 29,278,294 37,669,094 11,552,977 7,298,069
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $320,208, $312,649,
$862,361 and $1,034,881, respectively)........... $ 96,434,308 $ 29,278,294 $ 18,117,090 $ 11,552,977
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO SHORT-TERM MULTI-MARKET PORTFOLIO
------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 1,277,693 $ 1,133,993 $ 308,027 $ 1,307,834
Net realized gain (loss) on investment
transactions..................................... 9,399,724 11,527,647 12,232 (910,867)
Net realized gain (loss) on foreign currency
transactions..................................... 536 18,489 36,126 (964,669)
Net change in unrealized appreciation of investments
and foreign currency denominated assets and
liabilities...................................... 8,263,950 4,605,887 107,268 1,423,840
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 18,941,903 17,286,016 463,653 856,138
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (1,128,565) (531,525) (369,515) -0-
Net realized gain on investments.................... (11,815,383) (551,658) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease)............................. 78,738,622 (15,911,876) 3,866,088 (18,624,919)
------------- -------------- -------------- --------------
Total increase (decrease)........................... 84,736,577 290,957 3,960,226 (17,768,781)
NET ASSETS
Beginning of period................................. 41,992,828 41,701,871 3,152,078 20,920,859
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $1,279,177, $1,130,049,
$307,934 and $369,422, respectively)............. $ 126,729,405 $ 41,992,828 $ 7,112,304 $ 3,152,078
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/
HIGH GRADE SECURITIES PORTFOLIO TOTAL RETURN PORTFOLIO
--------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 1,425,623 $ 600,099 $ 480,735 $ 88,070
Net realized gain on investment
transactions..................................... 48,507 319,393 1,019,837 49,542
Net realized gain (loss) on foreign currency
transactions..................................... (53,678) 29,033 -0- -0-
Net change in unrealized appreciation (depreciation)
of investments and foreign currency denominated
assets and liabilities........................... (477,962) 777,806 1,338,504 424,620
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 942,490 1,726,331 2,839,076 562,232
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (621,506) (149,971) (88,093) (10,089)
Net realized gain on investments.................... (289,591) -0- (44,705) -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 12,171,992 10,268,875 14,926,631 6,940,398
------------- -------------- -------------- --------------
Total increase...................................... 12,203,385 11,845,235 17,632,909 7,492,541
NET ASSETS
Beginning of period................................. 16,946,519 5,101,284 8,242,441 749,900
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $1,424,586, $620,469,
$480,563 and $87,921, respectively).............. $ 29,149,904 $ 16,946,519 $ 25,875,350 $ 8,242,441
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO MONEY MARKET PORTFOLIO
-------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 395,473 $ 148,832 $ 2,336,884 $ 798,013
Net realized gain (loss) on investment
transactions..................................... 841,241 60,209 (343) 726
Net realized gain on foreign currency
transactions..................................... 65,399 136,755 -0- -0-
Net change in unrealized appreciation of investments
and foreign currency denominated assets and
liabilities...................................... 684,246 823,228 -0- -0-
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 1,986,359 1,169,024 2,336,541 798,739
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (155,834) (23,594) (2,336,884) (798,013)
Net realized gain on investments.................... (244,881) (29,314) -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 26,196,817 8,149,131 36,677,326 21,193,287
------------- -------------- -------------- --------------
Total increase...................................... 27,782,461 9,265,247 36,676,983 21,194,013
NET ASSETS
Beginning of period................................. 16,541,635 7,276,388 28,092,308 6,898,295
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $394,436, $154,797,
$803 and $803, respectively)..................... $ 44,324,096 $ 16,541,635 $ 64,769,291 $ 28,092,308
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL DOLLAR NORTH AMERICAN
GOVERNMENT PORTFOLIO GOVERNMENT INCOME PORTFOLIO
-------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 481,784 $ 190,779 $ 1,243,424 $ 628,992
Net realized gain on investment
transactions..................................... 745,244 13,908 821 21,305
Net realized loss on foreign currency
transactions..................................... -0- -0- (166,651) (582,809)
Net change in unrealized appreciation of investments
and foreign currency denominated assets and
liabilities...................................... 126,646 317,262 841,208 1,031,464
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 1,353,674 521,949 1,918,802 1,098,952
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (191,319) (28,002) (49,608) (144,624)
Net realized gain on investments.................... (13,292) -0- (3,969) -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 3,920,248 2,137,822 7,552,498 2,475,517
------------- -------------- -------------- --------------
Total increase...................................... 5,069,311 2,631,769 9,417,723 3,429,845
NET ASSETS
Beginning of period................................. 3,778,095 1,146,326 7,277,927 3,848,082
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $479,024, $188,559,
$1,241,756 and $47,940, respectively)............ $ 8,847,406 $ 3,778,095 $ 16,695,650 $ 7,277,927
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO GROWTH PORTFOLIO
----------------------------------- ------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 291,723 $ 81,490 $ 312,217 $ 271,351
Net realized gain (loss) on investment
transactions..................................... (29,624) 146,191 6,453,535 1,503,347
Net realized gain (loss) on foreign currency
transactions..................................... (1,398) 2,026 944 (8,006)
Net change in unrealized appreciation of investments
and foreign currency denominated assets and
liabilities...................................... 796,030 336,155 16,515,677 3,495,519
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 1,056,731 565,862 23,282,373 5,262,211
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (81,842) (19,130) (230,200) (10,913)
Net realized gain on investments.................... (155,981) -0- (1,507,259) -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 7,787,344 4,449,560 71,923,266 34,476,649
------------- -------------- -------------- --------------
Total increase...................................... 8,606,252 4,996,292 93,468,180 39,727,947
NET ASSETS
Beginning of period................................. 6,250,541 1,254,249 45,219,711 5,491,764
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $291,209, $81,328,
$348,559 and $266,542, respectively)............. $ 14,856,793 $ 6,250,541 $ 138,687,891 $ 45,219,711
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO CONSERVATIVE INVESTORS PORTFOLIO
--------------------------------- --------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 260,056 $ 95,371 $ 611,534 $ 127,493
Net realized gain (loss) on investment
transactions..................................... 526,159 (45,435) (51,567) 55,975
Net realized loss on foreign currency
transactions..................................... (18,329) (3,414) (4,003) -0-
Net change in unrealized appreciation of
investments and foreign currency denominated
assets and liabilities........................... 1,117,579 215,820 466,246 255,556
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 1,885,465 262,342 1,022,210 439,024
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (90,574) (7,193) (127,029) (3,619)
Net realized gain on investments.................... -0- -0- (56,297) -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 11,065,148 4,564,563 13,470,589 6,283,423
------------- -------------- -------------- --------------
Total increase...................................... 12,860,039 4,819,712 14,309,473 6,718,828
NET ASSETS
Beginning of period................................. 5,946,774 1,127,062 7,419,720 700,892
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $259,759, $90,277,
$611,841 and $127,336, respectively)............. $ 18,806,813 $ 5,946,774 $ 21,729,193 $ 7,419,720
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO TECHNOLOGY PORTFOLIO QUASAR PORTFOLIO
-------------------------------- -------------------- ----------------
YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996(a) 1996(b)
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................... $ 177,916 $ 55,823 $ 142,949 $ 11,162
Net realized gain (loss) on investment
transactions..................................... 175,910 16,967 (355,160) 25,330
Net realized loss on foreign currency
transactions..................................... (570) -0- -0- -0-
Net change in unrealized appreciation of
investments and foreign currency denominated
assets and liabilities........................... 507,668 237,378 2,059,794 148,141
------------- -------------- -------------- --------------
Net increase in net assets from operations.......... 860,924 310,168 1,847,583 184,633
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (55,626) (903) -0- -0-
Net realized gain on investments.................... (16,764) -0- -0- -0-
CAPITAL STOCK TRANSACTIONS
Net increase........................................ 4,942,686 4,348,053 26,235,848 8,657,184
------------- -------------- -------------- --------------
Total increase...................................... 5,731,220 4,657,318 28,083,431 8,841,817
NET ASSETS
Beginning of period................................. 4,978,116 320,798 -0- -0-
------------- -------------- -------------- --------------
End of period (including undistributed net
investment income of $178,277, $55,987,
$142,949 and $11,162, respectively).............. $ 10,709,336 $ 4,978,116 $ 28,083,431 $ 8,841,817
============= ============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
(a) Commencement of operations, January 11, 1996.
(b) Commencement of operations, August 5, 1996.
See Notes to Financial Statements.
B-61
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE A -SIGNIFICANT ACCOUNTING POLICIES
Alliance Variable Products Series Fund, Inc. (the "Fund"), was incorporated in
the State of Maryland on November 17, 1987 as an open-end series investment
company. The Fund had no operations prior to November 28, 1990. The Fund offers
seventeen separately managed pools of assets which have differing investment
objectives and policies. The Fund currently issues shares of the Premier Growth
Portfolio, Global Bond Portfolio, Growth and Income Portfolio, Short-Term
Multi-Market Portfolio, U.S. Government/High Grade Securities Portfolio, Total
Return Portfolio, International Portfolio, Money Market Portfolio, Global
Dollar Government Portfolio, North American Government Income Portfolio,
Utility Income Portfolio, Growth Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio, Growth Investors Portfolio, Technology
Portfolio and Quasar Portfolio (the "Portfolios"). The investment objectives of
each Portfolio are as follows:
PREMIER GROWTH PORTFOLIO-seeks growth of capital employing aggressive
investment policies. Since investments will be made based upon their potential
for capital appreciation, current income will be incidental to the objective of
capital growth. The Portfolio is not intended for investors whose principal
objective is assured income or preservation of capital.
GLOBAL BOND PORTFOLIO-seeks a high level of return from a combination of
current income and capital appreciation by investing in a globally diversified
portfolio of high quality debt securities denominated in the U.S. Dollar and a
range of foreign currencies.
GROWTH AND INCOME PORTFOLIO-seeks reasonable current income and opportunities
for appreciation through investments primarily in dividend-paying common stocks
of good quality.
SHORT-TERM MULTI-MARKET PORTFOLIO-seeks the highest level of current income,
consistent with what the Fund's Adviser considers to be prudent investment
risk, that is available from a portfolio of high-quality debt securities having
remaining maturities of not more than three years.
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO-seeks a high level of current
income consistent with preservation of capital by investing principally in a
portfolio of U.S. Government securities and other high grade debt securities.
TOTAL RETURN PORTFOLIO-seeks to achieve a high return through a combination of
current income and capital appreciation by investing in a diversified portfolio
of common and preferred stocks, senior corporate debt securities, and U.S.
Government and agency obligations, bonds and senior debt securities.
INTERNATIONAL PORTFOLIO-seeks to obtain a total return on its assets from
long-term growth of capital principally through a broad portfolio of marketable
securities of established non-United States companies, companies participating
in foreign economies with prospects for growth, and foreign government
securities.
MONEY MARKET PORTFOLIO-seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
GLOBAL DOLLAR GOVERNMENT PORTFOLIO-seeks a high level of current income through
investing substantially all of its assets in U.S. and non-U.S. fixed income
securities denominated only in U.S. Dollars. As a secondary objective, the
Portfolio seeks capital appreciation.
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO-seeks the highest level of current
income, consistent with what the Fund's Adviser considers to be prudent
investment risk, that is available from a portfolio of debt securities issued
or guaranteed by the governments of the United States, Canada and Mexico, their
political subdivisions (including Canadian Provinces but excluding the States
of the United States), agencies, instrumentalities or
B-62
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
authorities. The Portfolio seeks high current yields by investing in government
securities denominated in local currency and U.S. Dollars. Normally, the
Portfolio expects to maintain at least 25% of its assets in securities
denominated in the U.S. Dollar.
UTILITY INCOME PORTFOLIO-seeks current income and capital appreciation by
investing primarily in the equity and fixed-income securities of companies in
the "utilities industry." The Portfolio's investment objective and policies are
designed to take advantage of the characteristics and historical performance of
securities of utilities companies.
GROWTH PORTFOLIO-seeks long-term growth of capital by investing primarily in
common stocks and other equity securities.
WORLDWIDE PRIVATIZATION PORTFOLIO-seeks long-term capital appreciation by
investing principally in equity securities issued by enterprises that are
undergoing, or have undergone, privatization. The balance of the Portfolio's
investment portfolio will include equity securities of companies that are
believed by the Fund's Adviser to be beneficiaries of the privatization
process.
CONSERVATIVE INVESTORS PORTFOLIO-seeks the highest total return without, in the
view of the Fund's Adviser, undue risk to principal by investing in a
diversified mix of publicly traded equity and fixed-income securities.
GROWTH INVESTORS PORTFOLIO-seeks the highest total return consistent with what
the Fund's Adviser considers to be reasonable risk by investing in a
diversified mix of publicly traded equity and fixed-income securities.
TECHNOLOGY PORTFOLIO-seeks growth of capital through investment in companies
expected to benefit from advances in technology. The Portfolio invests
principally in a diversified portfolio of securities of companies which use
technology extensively in the development of new or improved products or
processes.
QUASAR PORTFOLIO-seeks growth of capital by pursuing aggressive investment
policies. The Portfolio invests principally in a diversified portfolio of
equity securities of any company and industry and in any type of security which
is believed to offer possibilities for capital appreciation.
The Fund offers and sells its shares only to separate accounts of certain life
insurance companies, for the purpose of funding variable annuity contracts and
variable life insurance policies. Sales are made without a sales charge, at
each Portfolio's net asset value per share.
The following is a summary of significant accounting policies followed by the
Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange are valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Listed securities not
traded and securities traded in the over-the-counter market, including listed
debt securities whose primary market is believed to be over-the-counter, are
valued at the mean between the most recent quoted bid and asked prices provided
by the principal market makers. Publicly traded sovereign debt obligations are
typically traded internationally on the over-the-counter market. Readily
marketable sovereign debt obligations and fixed income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed by the Adviser to reflect the fair value of such securities. Options
are valued at market value or fair value using methods determined by the Board
of Directors. Securities for which market quotations are not readily available
are valued in good faith at fair value using methods determined by the Board of
Directors. Securities which mature in 60 days or less are valued at amortized
cost, which approximates market value, unless this method does not represent
fair value.
2. OPTION WRITING
When a Portfolio writes an option, an amount equal to the premium received by
the Portfolio is recorded as a liability and is subsequently adjusted to the
current market value of the option written. Premiums received from writing
options which expire unexercised are recorded by the Portfolio on the
expiration date as
B-63
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
realized gains. The difference between the premium and the amount paid on
effecting a closing purchase transaction, including brokerage commissions, is
also recorded as a realized gain, or if the premium is less than the amount
paid for the closing purchase transaction, as a realized loss. If a call option
is exercised, the premium is added to the proceeds from the sale of the
underlying security or currency in determining whether the Portfolio has
realized a gain or loss. If a put option is exercised, the premium reduces the
cost basis of the security or currency purchased by the Portfolio. In writing
an option, the Portfolio bears the market risk of unfavorable changes in the
price of the security or currency underlying the written option. Exercise of an
option written by the Portfolio could result in the Portfolio selling or buying
a security or currency at a price different from the current market value.
3. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked prices of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated at the rates
of exchange prevailing when such securities were acquired or sold. Income and
expenses are translated at rates of exchange prevailing when accrued.
The Portfolios isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held.
Net foreign exchange gains (losses) of $7,112, $536, $36,126, $(53,678),
$65,399, $(166,651), $(1,398), $944, $(18,329), $(4,003) and $(570) for the
Global Bond Portfolio, Growth and Income Portfolio, Short-Term Multi-Market
Portfolio, U.S. Government/ High Grade Securities Portfolio, International
Portfolio, North American Government Income Portfolio, Utility Income
Portfolio, Growth Portfolio, Worldwide Privatization Portfolio, Conservative
Investors Portfolio and Growth Investors Portfolio, respectively, represent
foreign exchange gains and losses from sales and maturities of securities,
holding of foreign currencies, options on foreign currencies, exchange gains or
losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of interest and dividends
recorded on the Portfolio's books and the U.S. dollar equivalent of the amounts
actually received or paid.
Net currency gains and losses from valuing foreign currency denominated assets
and liabilities at period end exchange rates are reflected as a component of
net change in unrealized appreciation (depreciation) on investments and foreign
currency denominated assets and liabilities.
4. ORGANIZATION EXPENSES
Organization expenses of each Portfolio have been deferred and are being
amortized on a straight-line basis as follows: Premier Growth Portfolio $27,506
through June 1997; U.S. Government/High Grade Securities Portfolio $24,384
through September 1997; Total Return Portfolio $24,384 through December 1997;
International Portfolio $24,983 through December 1997; Money Market Portfolio
$24,983 through December 1997; Global Dollar Government Portfolio $16,723
through April 1999; North American Government Income Portfolio $21,570 through
April 1999; Utility Income Portfolio $15,299 through April 1999; Growth
Portfolio $10,000 through September 1999; Worldwide Privatization Portfolio
$10,000 through September 1999; Conservative Investors Portfolio $10,000
through October 1999, Growth Investors Portfolio $10,000 through October 1999,
Technology Portfolio $21,500 through January 2001 and Quasar Portfolio $26,098
through August 2001.
5. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if applicable, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
6. INVESTMENT INCOME AND SECURITY TRANSACTIONS
Interest income is accrued daily. Dividend income is recorded on the
ex-dividend date. Security transactions
B-64
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
are accounted for on the date securities are purchased or sold. Security gains
and losses are determined on the identified cost basis. The Fund accretes
discounts as adjustments to interest income.
7. DIVIDENDS AND DISTRIBUTIONS
Each Portfolio declares and distributes dividends and
distributions from net investment income and net realized gains, respectively,
if any, at least annually, except for dividends on the Money Market Portfolio,
which are declared daily and paid monthly. Income dividends and capital gain
distributions are determined in accordance with income tax regulations.
- -------------------------------------------------------------------------------
NOTE B - ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, each Portfolio pays
Alliance Capital Management L.P., (the "Adviser"), an investment advisory fee,
based on average net assets at the following annual rates: Premier Growth
Portfolio, 1%; Global Bond Portfolio, .65 of 1%; Growth and Income Portfolio,
.625 of 1%; Short-Term Multi-Market Portfolio, .55 of 1%; U.S. Government/High
Grade Securities Portfolio, .60 of 1%; Total Return Portfolio, .625 of 1%;
International Portfolio, 1%; Money Market Portfolio, .50 of 1%; Global Dollar
Government Portfolio, .75 of 1%; North American Government Income Portfolio,
.65 of 1%; Utility Income Portfolio, .75 of 1%; Growth Portfolio, .75 of 1%;
Worldwide Privatization Portfolio, 1%; Conservative Investors Portfolio, .75 of
1%; Growth Investors Portfolio, .75 of 1%; Technology Portfolio, 1%; and Quasar
Portfolio, 1%. Such fee is accrued daily and paid monthly. For the Global Bond
Portfolio, the adviser has retained, under a sub-advisory agreement, a
sub-adviser, AIGAM International Ltd., an affiliate of American International
Group, Inc.
The Adviser voluntarily agreed to reimburse each Portfolio based on their
respective average net assets for expenses exceeding .95% for the year ended
December 31, 1996. Expense reimbursements, if any, are accrued daily and paid
monthly. For the year ended December 31, 1996, such reimbursements amounted to
$174,999, $30,455, $1,981, $58,473, $13,684, $30,782, $292,872, $1,152,
$57,498, $51,957, $62,408, $8,160, $104,050, $69,878, $80,065, $82,377 and
$41,815 for the Premier Growth Portfolio, the Global Bond Portfolio, the Growth
and Income Portfolio, the Short-Term Multi-Market Portfolio, the U.S.
Government/High Grade Securities Portfolio, the Total Return Portfolio, the
International Portfolio, the Money Market Portfolio, the Global Dollar
Government Portfolio, the North American Government Income Portfolio, the
Utility Income Portfolio, the Growth Portfolio, the Worldwide Privatization
Portfolio, the Conservative Investors Portfolio, the Growth Investors
Portfolio, the Technology Portfolio and the Quasar Portfolio, respectively.
Each Portfolio compensates Alliance Fund Services, Inc. (a wholly-owned
subsidiary of the Adviser) for providing personnel and facilities to perform
transfer agency services for the Fund. Such compensation amounted to $1,108 for
the Premier Growth Portfolio, the Global Bond Portfolio, the Short-Term
Multi-Market Portfolio, the U.S. Government/High Grade Securities Portfolio,
the Total Return Portfolio, the International Portfolio, the Money Market
Portfolio, the Global Dollar Government Portfolio, the North American
Government Income Portfolio, the Utility Income Portfolio, the Growth
Portfolio, the Worldwide Privatization Portfolio, the Conservative Investors
Portfolio and the Growth Investors Portfolio, and $101, $1,020, and $265 for
the Growth and Income Portfolio, the Technology Portfolio and the Quasar
Portfolio, respectively, for the year ended December 31, 1996.
Brokerage commissions paid for the year ended December 31, 1996 on securities
transactions amounted to $90,253, $255,607, $260,435, $30,275, $31,907,
$287,449, $41,894, $23,162, $28,063, $10,847, and $12,207 on the Premier Growth
Portfolio, the Growth and Income Portfolio, the International Portfolio, the
Total Return Portfolio, the Utility Income Portfolio, the Growth Portfolio, the
Worldwide Privatization Portfolio, the Conservative Investors Portfolio, the
Growth Investors Portfolio, the Technology Portfolio and the Quasar Portfolio,
respectively, none of which was paid to affiliated brokers.
B-65
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
NOTE C - INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
-------------------------------------- ---------------------------------------
STOCKS AND U.S. GOVERNMENT STOCKS AND U.S. GOVERNMENT
PORTFOLIO DEBT OBLIGATIONS AND AGENCIES DEBT OBLIGATIONS AND AGENCIES
- --------- ---------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Premier Growth............................. $ 76,932,252 $ -0- $ 19,077,087 $ -0-
Global Bond................................ 25,876,347 7,715,539 20,670,020 6,754,344
Growth and Income.......................... 133,846,257 -0- 66,379,710 -0-
Short-Term Multi-Market.................... 4,747,143 2,039,274 3,047,376 1,037,629
U.S. Government/High Grade Securities...... 16,155,861 27,672,220 5,046,720 26,705,429
Total Return............................... 17,569,661 5,695,297 8,681,654 -0-
International.............................. 40,701,269 -0- 16,619,578 -0-
Global Dollar Government................... 12,122,336 -0- 7,869,900 648,543
North American Government Income........... 1,974,847 2,359,969 303,083 -0-
Utility Income............................. 15,284,351 -0- 7,657,155 -0-
Growth..................................... 149,805,845 -0- 82,877,908 -0-
Worldwide Privatization.................... 14,801,255 -0- 4,696,728 -0-
Conservative Investors..................... 14,133,067 24,060,882 7,000,131 18,243,847
Growth Investors........................... 12,867,010 4,887,959 7,028,712 4,533,491
Technology ................................ 20,274,849 -0- 2,086,825 -0-
Quasar..................................... 8,269,072 -0- 1,137,358 -0-
</TABLE>
At December 31, 1996, the cost of investments for federal income tax purposes
and the tax basis gross unrealized appreciation, depreciation and net
unrealized appreciation (depreciation) were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED NET
-------------------------------------- UNREALIZED
PORTFOLIO COST APPRECIATION DEPRECIATION APPRECIATION
- --------- ---------------- --------------- ----------------- ------------
<S> <C> <C> <C> <C>
Premier Growth................................ $ 78,845,258 $ 18,701,940 $ (1,491,373) 17,210,567
Global Bond................................... 17,098,659 373,397 (215,506) 157,891
Growth and Income............................. 113,631,858 14,293,546 (1,561,270) 12,732,276
Short-Term Multi-Market....................... 6,928,674 23,994 (22,475) 1,519
U.S. Government/High Grade Securities......... 28,720,906 293,399 (222,601) 70,798
Total Return.................................. 23,976,844 2,025,711 (271,208) 1,754,503
International................................. 42,921,329 3,781,471 (2,478,159) 1,303,312
Global Dollar Government...................... 8,157,659 576,712 (190,999) 385,713
North American Government Income.............. 15,384,697 1,181,185 (44,610) 1,136,575
Utility Income................................ 13,527,111 1,322,090 (222,879) 1,099,211
Growth........................................ 119,523,357 23,865,413 (3,721,548) 20,143,865
Worldwide Privatization....................... 17,044,295 1,914,087 (611,964) 1,302,123
Conservative Investors........................ 20,833,450 977,550 (274,789) 702,761
Growth Investors.............................. 9,945,041 1,087,158 (373,412) 713,746
Technology ................................... 25,712,675 3,257,456 (1,197,662) 2,059,794
Quasar........................................ 8,360,595 347,940 (203,503) 144,437
</TABLE>
B-66
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
At December 31, 1996, for federal income tax purposes, the Premier Growth,
Money Market, North American Government Income, Utility Income, Conservative
Investors and Technology Portfolios had net capital loss carryforwards of
$714,471, $343, $2,290, $46,396, $33,656 and $355,160 which expire in 2004,
respec-tively. Short-Term Multi-Market had net capital loss carryforward of
$1,097,934 (of which $5,518 expires in 2001, $150,822 expires in 2002, and
$941,594 expires in 2003).
The Global Bond, Short-Term Multi-Market, U.S. Government/High Grade Securities
and North American Government Income Portfolios enter into forward exchange
currency contracts in order to hedge their exposure to changes in foreign
currency exchange rates on their foreign portfolio holdings. A forward contract
is a commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The Portfolios may enter into contracts to deliver or
receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. The gain or loss arising from the
difference between the original contract and the closing of such contract is
included in realized gains or losses from foreign currency transactions.
Fluctuations in the value of forward exchange currency contracts are recorded
for financial reporting purposes as unrealized gains or losses by the
Portfolio. The Fund's custodian will place and maintain cash not available for
investment or government securities in a separate account of the Fund having a
value equal to the aggregate amount of the Fund's commitments under forward
exchange currency contracts entered into with respect to position hedges. Risks
may arise from the potential inability of a counterparty to meet the terms of a
contract and from unanticipated movements in the value of a foreign currency
relative to the U.S. dollar. At December 31, 1996, the outstanding forward
exchange currency contracts were as follows:
GLOBAL BOND PORTFOLIO:
<TABLE>
<CAPTION>
CONTRACT VALUE ON U.S.$
AMOUNT ORIGINATION CURRENT UNREALIZED
FOREIGN CURRENCY SALE CONTRACTS (000) DATE VALUE APPRECIATION
- ------------------------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Australian Dollars, expiring 1/06/97............................. 900 $ 738,000 $ 715,305 $ 22,695
============
</TABLE>
SHORT-TERM MULTI-MARKET PORTFOLIO:
- ---------------------------------
<TABLE>
<CAPTION>
CONTRACT VALUE ON U.S.$ UNREALIZED
AMOUNT ORIGINATION CURRENT APPRECIATION
FOREIGN CURRENCY BUY CONTRACTS (000) DATE VALUE (DEPRECIATION)
- ------------------------------ ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Deutsche Marks, expiring 2/04/97................................. 586 $ 380,025 $ 381,645 $ 1,620
Spanish Pesetas, expiring 3/27/97................................ 22,000 167,647 169,126 1,479
Swiss Francs, expiring 1/06/97................................... 744 568,837 556,263 (12,574)
FOREIGN CURRENCY SALE CONTRACTS
Australian Dollars, expiring 1/09/97............................. 907 725,421 720,623 4,798
Canadian Dollars, expiring 1/21/97............................... 375 276,460 274,151 2,309
Deutsche Marks, expiring 1/27/97-2/04/97......................... 1,723 1,123,340 1,121,941 1,399
Finnish Markka, expiring 1/17/97................................. 1,178 257,994 256,441 1,553
French Francs, expiring 3/27/97.................................. 882 168,852 170,807 (1,955)
New Zealand Dollars, expiring 1/21/97............................ 200 140,070 141,206 (1,136)
Norwegian Krone, expiring 2/04/97................................ 1,400 218,473 217,662 811
Spanish Pesetas, expiring 1/27/97................................ 25,000 198,098 192,432 5,666
Swedish Krona, expiring 1/27/97.................................. 2,059 311,903 302,329 9,574
Swiss Francs, expiring 1/06/97................................... 744 599,549 556,263 43,286
-----------
$ 56,830
===========
</TABLE>
B-67
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO:
<TABLE>
<CAPTION>
CONTRACT VALUE ON U.S.$
AMOUNT ORIGINATION CURRENT UNREALIZED
FOREIGN CURRENCY SALE CONTRACTS (000) DATE VALUE APPRECIATION
- ------------------------------- ----------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Australian Dollars, expiring 2/25/97.............. 767 $ 621,914 $ 609,580 $ 12,334
===========
</TABLE>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO:
<TABLE>
<CAPTION>
CONTRACT VALUE ON U.S.$
AMOUNT ORIGINATION CURRENT UNREALIZED
FOREIGN CURRENCY SALE CONTRACTS (000) DATE VALUE APPRECIATION
- ------------------------------- ----------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Canadian Dollars, expiring 1/31/97-3/12/97........ 1,600 $ 1,192,270 $ 1,171,623 $ 20,647
===========
</TABLE>
- -------------------------------------------------------------------------------
NOTE D - CAPITAL STOCK
There are 900,000,000 shares of capital stock, $.001 par value per share of the
Fund authorized. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ -----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold............................................ 3,544,816 2,743,464 $ 57,846,653 $ 42,977,782
Shares issued in reinvestment of dividends
and distributions................................... 1,261,734 24,754 17,639,042 371,559
Shares redeemed........................................ (307,428) (4,167,864) (4,698,027) (71,560,743)
--------------- --------------- --------------- ---------------
Net increase (decrease)................................ 4,499,122 (1,399,646) $ 70,787,668 $ (28,211,402)
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold............................................ 542,902 232,590 $ 6,400,878 $ 2,666,899
Shares issued in reinvestment of dividends
and distributions................................... 122,714 6,352 1,344,941 72,090
Shares redeemed........................................ (73,483) (31,126) (850,289) (336,122)
--------------- --------------- --------------- ---------------
Net increase........................................... 592,133 207,816 $ 6,895,530 $ 2,402,867
=============== =============== =============== ===============
</TABLE>
B-68
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold......................................... 4,431,728 2,176,403 $ 69,859,324 $ 31,126,890
Shares issued in reinvestment of dividends
and distributions................................ 897,017 79,180 12,943,948 1,083,182
Shares redeemed..................................... (260,259) (3,114,447) (4,064,650) (48,121,948)
--------------- --------------- --------------- ---------------
Net increase (decrease)............................. 5,068,486 (858,864) $ 78,738,622 $ (15,911,876)
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 664,791 485,653 $ 7,076,379 $ 4,901,077
Shares issued in reinvestment of dividends
and distributions............................... 36,156 -0- 369,515 -0-
Shares redeemed.................................... (336,158) (2,299,084) (3,579,806) (23,525,996)
--------------- --------------- --------------- ---------------
Net increase (decrease)............................ 364,789 (1,813,431) $ 3,866,088 $ (18,624,919)
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 1,420,578 1,256,331 $ 16,046,280 $ 13,737,462
Shares issued in reinvestment of dividends
and distributions............................... 84,596 13,708 911,097 149,970
Shares redeemed.................................... (426,894) (330,322) (4,785,385) (3,618,557)
--------------- --------------- --------------- ---------------
Net increase....................................... 1,078,280 939,717 $ 12,171,992 $ 10,268,875
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 1,193,848 610,625 $ 15,859,123 $ 7,402,831
Shares issued in reinvestment of dividends
and distributions............................... 10,076 866 132,799 10,089
Shares redeemed.................................... (78,997) (39,552) (1,065,291) (472,522)
--------------- --------------- --------------- ---------------
Net increase....................................... 1,124,927 571,939 $ 14,926,631 $ 6,940,398
=============== =============== =============== ===============
</TABLE>
B-69
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 2,116,357 761,751 $ 30,825,850 $ 10,153,923
Shares issued in reinvestment of dividends
and distributions............................... 27,149 4,039 400,715 52,908
Shares redeemed.................................... (342,716) (154,693) (5,029,748) (2,057,700)
--------------- --------------- --------------- ---------------
Net increase....................................... 1,800,790 611,097 $ 26,196,817 $ 8,149,131
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 178,619,585 72,470,594 $ 178,619,585 $ 72,470,594
Shares issued in reinvestment of dividends......... 2,336,582 799,144 2,336,582 799,144
Shares redeemed.................................... (144,278,841) (52,076,451) (144,278,841) (52,076,451)
--------------- --------------- ---------------- ---------------
Net increase....................................... 36,677,326 21,193,287 $ 36,677,326 $ 21,193,287
=============== =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 373,824 234,218 $ 4,866,573 $ 2,508,397
Shares issued in reinvestment of dividends
and distributions............................... 17,037 2,647 204,610 28,002
Shares redeemed.................................... (89,291) (37,201) (1,150,935) (398,577)
--------------- --------------- --------------- ---------------
Net increase....................................... 301,570 199,664 $ 3,920,248 $ 2,137,822
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 933,567 528,380 $ 10,739,062 $ 4,987,369
Shares issued in reinvestment of dividends
and distributions............................... 4,805 15,806 53,576 144,624
Shares redeemed.................................... (283,721) (287,428) (3,240,140) (2,656,476)
--------------- --------------- --------------- ---------------
Net increase....................................... 654,651 256,758 $ 7,552,498 $ 2,475,517
=============== =============== =============== ===============
</TABLE>
B-70
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 776,031 443,081 $ 9,308,720 $ 4,987,939
Shares issued in reinvestment of dividends
and distributions............................... 20,206 1,762 237,823 19,131
Shares redeemed.................................... (146,278) (50,420) (1,759,199) (557,510)
--------------- --------------- --------------- ---------------
Net increase....................................... 649,959 394,423 $ 7,787,344 $ 4,449,560
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 4,744,489 2,718,920 $ 74,657,741 $ 35,309,744
Shares issued in reinvestment of dividends
and distributions............................... 111,233 874 1,737,459 10,912
Shares redeemed.................................... (292,788) (64,342) (4,471,934) (844,007)
--------------- --------------- --------------- ---------------
Net increase....................................... 4,562,934 2,655,452 $ 71,923,266 $ 34,476,649
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 977,499 430,445 $ 12,011,656 $ 4,671,434
Shares issued in reinvestment of dividends
and distributions............................... 7,424 662 90,574 7,193
Shares redeemed.................................... (84,263) (10,458) (1,037,082) (114,064)
--------------- --------------- --------------- ---------------
Net increase....................................... 900,660 420,649 $ 11,065,148 $ 4,564,563
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 1,387,334 600,037 $ 15,999,200 $ 6,706,928
Shares issued in reinvestment of dividends
and distributions............................... 16,196 328 183,326 3,620
Shares redeemed.................................... (234,084) (39,275) (2,711,937) (427,125)
--------------- --------------- --------------- ---------------
Net increase....................................... 1,169,446 561,090 $ 13,470,589 $ 6,283,423
=============== =============== =============== ===============
</TABLE>
B-71
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO
---------------------------------------------------------------------------
SHARES AMOUNT
------------------------------------ ----------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold........................................ 646,812 407,129 $ 7,777,769 $ 4,571,141
Shares issued in reinvestment of dividends
and distributions............................... 6,038 83 72,389 903
Shares redeemed.................................... (231,754) (20,469) (2,907,472) (223,991)
--------------- --------------- --------------- ---------------
Net increase....................................... 421,096 386,743 $ 4,942,686 $ 4,348,053
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO QUASAR PORTFOLIO
------------------------------------ ----------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- -------------- ---------------
JANUARY 11, 1996(A) AUGUST 5, 1996(A)
TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
Shares sold........................................ 2,807,022 $ 29,063,181 832,347 $ 8,673,741
Shares redeemed.................................... (263,543) (2,827,333) (1,598) (16,557)
--------------- --------------- --------------- ---------------
Net increase....................................... 2,543,479 $ 26,235,848 830,749 $ 8,657,184
=============== =============== =============== ===============
</TABLE>
(a) Commencement of operations.
- -------------------------------------------------------------------------------
NOTE E - RECLASSIFICATION OF COMPONENTS OF NET ASSETS
As a result of permanent differences between accounting and tax regulations in
the treatment of foreign currency transactions, short-term gains and tax
returns of capital distributions, the portfolios made the following
reclassifications during the year ended December 31, 1996:
<TABLE>
<CAPTION>
UNDISTRIBUTED
(OVERDISTRIBUTED) ACCUMULATED
PAID-IN NET INVESTMENT NET REALIZED
PORTFOLIO CAPITAL INCOME GAIN (LOSS)
- --------- --------------- ----------------- ------------
<S> <C> <C> <C>
Premier Growth.......................................... $ -0- $ 3,219 $ (3,219)
Global Bond............................................. (489) 58,206 (57,717)
Growth and Income....................................... (658) (9,929) 10,587
Short-Term Multi-Market................................. -0- 38,967 (38,967)
U.S. Government/High Grade Securities................... -0- (54,050) 54,050
Total Return............................................ -0- 480 (480)
International........................................... -0- 67,673 (67,673)
Money Market............................................ -0- 243 (243)
Global Dollar Government................................ -0- 3,929 (3,929)
North American Government Income........................ -0- (163,970) 163,970
Utility Income.......................................... -0- (2,181) 2,181
Growth.................................................. -0- (86,022) 86,022
Worldwide Privatization................................. -0- 48,688 (48,688)
Conservative Investors.................................. -0- (3,931) 3,931
Growth Investors........................................ -0- (577) 577
Technology ............................................. (10) 10 -0-
</TABLE>
Net investment income, net realized gains and net assets were not affected by
the reclassifications.
B-72
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREMIER GROWTH PORTFOLIO
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, JUNE 26, 1992(A)
------------------------------------------------ TO
1996 1995 1994 1993 DECEMBER 31, 1992
------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................... $ 17.80 $ 12.37 $ 12.79 $ 11.38 $ 10.00
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .08 (c) .09 (c) .03 (c) -0- .06 (c)
Net realized and unrealized gain (loss) on investments...... 3.29 5.44 (.41) 1.43 1.32
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. 3.37 5.53 (.38) 1.43 1.38
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.10) (.03) (.01) (.01) -0-
Distributions from net realized gains....................... (5.37) (.07) (.03) (.01) -0-
-------- --------- --------- --------- --------
Total dividends and distributions........................... (5.47) (.10) (.04) (.02) -0-
-------- --------- --------- --------- --------
Net asset value, end of period.............................. $ 15.70 $ 17.80 $ 12.37 $ 12.79 $ 11.38
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 22.70% 44.85% (2.96)% 12.63% 13.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... $96,434 $29,278 $37,669 $13,659 $3,760
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .95% .95% .95% 1.18% .95%(e)
Expenses, before waivers and reimbursements............... 1.23% 1.19% 1.40% 2.05% 4.20%(e)
Net investment income..................................... .52% .55% .42% .22% .96%(e)
Portfolio turnover rate..................................... 32% 97% 38% 42% 14%
Average commission rate paid (f)............................ $.0609 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BOND PORTFOLIO
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................... $ 12.15 $ 9.82 $ 11.33 $ 11.24 $ 11.10
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .67 (c) .69 (c) .57 (c) .77 (c) .64
Net realized and unrealized gain (loss) on investments
and foreign currency transactions......................... .01 1.73 (1.16) .43 (.13)
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. .68 2.42 (.59) 1.20 .51
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.84) (.09) (.62) (.85) (.28)
Distributions from net realized gains....................... (.25) -0- (.30) (.26) (.09)
-------- --------- --------- --------- --------
Total dividends and distributions........................... (1.09) (.09) (.92) (1.11) (.37)
-------- --------- --------- --------- --------
Net asset value, end of period.............................. $ 11.74 $ 12.15 $ 9.82 $ 11.33 $ 11.24
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 6.21% 24.73% (5.16)% 11.15% 4.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... $18,117 $11,553 $7,298 $6,748 $5,876
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .94% .95% .95% 1.50% 1.50%
Expenses, before waivers and reimbursements............... 1.15% 1.77% 2.05% 1.50% 1.97%
Net investment income..................................... 5.76% 6.22% 6.01% 4.85% 5.85%
Portfolio turnover rate..................................... 191% 262% 102% 125% 78%
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-73
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................... $ 15.79 $ 11.85 $ 12.18 $ 10.99 $ 10.35
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .24 (c) .27 (c) .10 (c) .01 (c) .10 (c)
Net realized and unrealized gain (loss) on investments...... 3.18 3.94 (.16) 1.27 .71
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. 3.42 4.21 (.06) 1.28 .81
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.25) (.13) (.10) (.06) (.17)
Distributions from net realized gains....................... (2.56) (.14) (.17) (.03) -0-
-------- --------- --------- --------- --------
Total dividends and distributions........................... (2.81) (.27) (.27) (.09) (.17)
-------- --------- --------- --------- --------
Net asset value, end of period.............................. $ 16.40 $ 15.79 $ 11.85 $ 12.18 $ 10.99
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 24.09% 35.76% (.35)% 11.69% 7.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... $126,729 $41,993 $41,702 $22,756 $7,803
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .82% .79% .90% 1.18% .99%
Expenses, before waivers and reimbursements............... .82% .79% .91% 1.28% 2.09%
Net investment income..................................... 1.58% 1.95% 1.71% 1.76% 2.42%
Portfolio turnover rate..................................... 87% 150% 95% 69% 49%
Average commission rate paid (f)............................ $.0602 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM MULTI-MARKET PORTFOLIO
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................... $ 10.58 $ 9.91 $ 11.07 $ 10.77 $ 10.68
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .64 (c) .82 (c) .47 (c) .28 (c) .63 (c)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions......................... .33 (.15) (1.16) .43 (.54)
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. .97 .67 (.69) .71 .09
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.82) -0- (.46) (.41) -0-
Return of capital........................................... -0- -0- (.01) -0- -0-
-------- --------- --------- --------- --------
Total dividends and distributions........................... (.82) -0- (.47) (.41) -0-
-------- --------- --------- --------- --------
Net asset value, end of period.............................. $ 10.73 $ 10.58 $ 9.91 $ 11.07 $ 10.77
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 9.57% 6.76% (6.51)% 6.62% .84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... $7,112 $3,152 $20,921 $23,560 $14,841
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .95% .95% .94% 1.17% .99%
Expenses, before waivers and reimbursements............... 2.09% 1.30% .99% 1.24% 1.66%
Net investment income..................................... 6.03% 8.22% 6.52% 6.39% 7.18%
Portfolio turnover rate..................................... 159% 379% 134% 210% 153%
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-74
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/HIGH GRADE SECURITIES PORTFOLIO
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 17, 1992(A)
---------------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
-------- -------- -------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period...........................$ 11.66 $ 9.94 $ 10.72 $ 9.89 $ 10.00
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .66 (c) .65 (c) .28 (c) .43 (c) .14 (c)
Net realized and unrealized gain (loss) on investments...... (.39) 1.25 (.71) .48 (.25)
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. .27 1.90 (.43) .91 (.11)
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.28) (.18) (.21) (.08) -0-
Distributions from net realized gains....................... (.13) -0- (.14) -0- -0-
-------- --------- --------- --------- --------
Total dividends and distributions........................... (.41) (.18) (.35) (.08) -0-
-------- --------- --------- --------- --------
Net asset value, end of period..............................$ 11.52 $ 11.66 $ 9.94 $ 10.72 $ 9.89
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 2.55% 19.26% (4.03)% 9.20% (1.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... $29,150 $16,947 $5,101 $1,350 $785
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .92% .95% .95% 1.16% .95% (e)
Expenses, before waivers and reimbursements............... .98% 1.58% 3.73% 5.42% 11.56% (e)
Net investment income..................................... 5.87% 5.96% 5.64% 4.59% 4.82% (e)
Portfolio turnover rate..................................... 137% 68% 32% 177% 13%
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A)
---------------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................... $ 12.80 $ 10.41 $ 10.97 $ 10.01 $ 10.00
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)................................... .27 (c) .36 (c) .15 (c) .15 (c) .01
Net realized and unrealized gain (loss) on investments...... 1.66 2.10 (.56) .81 -0-
-------- --------- --------- --------- --------
Net increase (decrease) in net asset value from operations.. 1.93 2.46 (.41) .96 .01
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................ (.07) (.07) (.09) -0- -0-
Distributions from net realized gains....................... (.03) -0- (.06) -0- -0-
-------- --------- --------- --------- --------
Total dividends and distributions........................... (.10) (.07) (.15) -0- -0-
-------- --------- --------- --------- --------
Net asset value, end of period.............................. $ 14.63 $ 12.80 $ 10.41 $ 10.97 $ 10.01
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)........ 15.17% 23.67% (3.77)% 9.59% .10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)................... 25,875 $8,242 $750 $360 $95
Ratio to average net assets of:
Expenses, net of waivers and reimbursements............... .95% .95% .95% 1.20% 0%
Expenses, before waivers and reimbursements............... 1.12% 4.49% 19.49% 25.96% 0%
Net investment income..................................... 2.76% 3.16% 2.29% 1.45% 2.21%(e)
Portfolio turnover rate..................................... 57% 30% 83% 25% 0%
Average commission rate paid (f)............................ $.0593 -0- -0- -0- -0-
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-75
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A)
--------------------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................$ 14.07 $ 12.88 $ 12.16 $ 10.00 $ 10.00
-------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b).............................. .19 (c) .18 (c) .10 (c) .03 (c) -0-
Net realized and unrealized gain on investments and
foreign currency transactions........................ .83 1.08 .72 (g) 2.13 -0-
-------- --------- ---------- --------- --------
Net increase in net asset value from operations........ 1.02 1.26 .82 2.16 -0-
-------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................... (.08) (.03) (.02) -0- -0-
Distributions from net realized gains.................. (.12) (.04) (.08) -0- -0-
-------- --------- --------- --------- --------
Total dividends and distributions...................... (.20) (.07) (.10) -0- -0-
-------- --------- --------- --------- --------
Net asset value, end of period.........................$ 14.89 $ 14.07 $ 12.88 $ 12.16 $ 10.00
======== ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d)... 7.25% 9.86% 6.70% 21.60% 0%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted).............. $44,324 $16,542 $7,276 $688 $79
Ratio to average net assets of:
Expenses, net of waivers and reimbursements.......... .95% .95% .95% 1.20% 0%
Expenses, before waivers and reimbursements.......... 1.91% 2.99% 7.26% 39.28% 0%
Net investment income................................ 1.29% 1.41% .90% .26% 2.07% (e)
Portfolio turnover rate................................ 60% 87% 95% 85% 0%
Average commission rate paid (f)....................... $.0431 -0- -0- -0- -0-
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 28, 1992(A)
--------------------------------------------------- TO
1996 1995 1994 1993 DECEMBER 31, 1992
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- --------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)............................. .05 .05 .03 .22 -0-
Net realized and unrealized gain on investments....... -0- -0- -0- -0- -0-
------- --------- --------- --------- --------
Net increase in net asset value from operations....... .05 .05 .03 .22 -0-
------- --------- --------- --------- --------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income.................. (.05) (.05) (.03) (.22) -0-
Distributions from net realized gains................. -0- -0- -0- -0- -0-
------- --------- --------- --------- --------
Total dividends and distributions..................... (.05) (.05) (.03) (.22) -0-
------- --------- --------- --------- --------
Net asset value, end of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ========= ========= ========= ========
TOTAL RETURN
Total investment return based on net asset value (d).. 4.71% 4.97% 3.27% 2.25% .02%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)............. $64,769 $28,092 $6,899 $102 $30
Ratio to average net assets of:
Expenses, net of waivers and reimbursements......... .69% .95% .95% 1.16% 0%
Expenses, before waivers and reimbursements......... .69% 1.07% 4.46% 68.14% 0%
Net investment income............................... 4.64% 4.85% 3.98% 2.15% 3.05%(e)
Portfolio turnover rate............................... 0% 0% 0% 0% 0%
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-76
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL DOLLAR GOVERNMENT PORTFOLIO
-----------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 2, 1994(A)
------------------------------ TO
1996 1995 DECEMBER 31, 1994
--------- ---------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period................................... $ 11.95 $ 9.84 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................................... 1.10 (c) .92 (c) .36 (c)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions..................... 1.78 1.32 (.52)
--------- ---------- ---------
Net increase (decrease) in net asset value from operations.......... 2.88 2.24 (.16)
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................ (.48) (.13) -0-
Distributions from net realized gains............................... (.03) -0- -0-
--------- ---------- ---------
Total dividends and distributions................................... (.51) (.13) -0-
--------- ---------- ---------
Net asset value, end of period...................................... $ 14.32 $ 11.95 $ 9.84
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)................ 24.90% 22.98% (1.60)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........................... $8,847 $3,778 $1,146
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....................... .95% .95% .95% (e)
Expenses, before waivers and reimbursements....................... 1.97% 4.82% 15.00% (e)
Net investment income............................................. 8.53% 8.65% 6.02% (e)
Portfolio turnover rate............................................. 155% 13% 9%
</TABLE>
<TABLE>
<CAPTION>
NORTH AMERICAN GOVERNMENT INCOME PORTFOLIO
-----------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 3, 1994(A)
------------------------------ TO
1996 1995 DECEMBER 31, 1994
--------- ---------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period................................... $ 10.48 $ 8.79 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................................... 1.26 (c) 1.13 (c) .50 (c)
Net realized and unrealized gain (loss) on
investments and foreign currency transactions..................... .69 .83 (1.71)
--------- ---------- ---------
Net increase (decrease) in net asset value from operations.......... 1.95 1.96 (1.21)
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................ (.05) (.27) -0-
Distributions from net realized gains............................... (.00) -0- -0-
--------- ---------- ---------
Total dividends and distributions................................... (.05) (.27) -0-
--------- ---------- ---------
Net asset value, end of period...................................... $ 12.38 $ 10.48 $ 8.79
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)................ 18.70% 22.71% (12.10)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........................... $16,696 $7,278 $3,848
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....................... .95% .95% .95% (e)
Expenses, before waivers and reimbursements....................... 1.41% 2.57% 4.43% (e)
Net investment income............................................. 11.04% 12.24% 8.49% (e)
Portfolio turnover rate............................................. 4% 35% 15%
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-77
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UTILITY INCOME PORTFOLIO
-------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 10, 1994(a)
----------------------------- TO
1996 1995 DECEMBER 31, 1994
--------- ---------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period.............................. $ 12.01 $ 9.96 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)...................................... .31 (c) .30 (c) .28 (c)
Net realized and unrealized gain (loss) on investments......... .62 1.83 (.32)
--------- ---------- ---------
Net increase (decrease) in net asset value from operations..... .93 2.13 (.04)
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................... (.09) (.08) -0-
Distributions from net realized gains.......................... (.16) -0- -0-
--------- ---------- ---------
Total dividends and distributions.............................. (.25) (.08) -0-
--------- ---------- ---------
Net asset value, end of period................................. $ 12.69 $ 12.01 $ 9.96
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)........... 7.88% 21.45% (.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)...................... $14,857 $6,251 $1,254
Ratio to average net assets of:
Expenses, net of waivers and reimbursements.................. .95% .95% .95% (e)
Expenses, before waivers and reimbursements.................. 1.51% 3.79% 15.98% (e)
Net investment income........................................ 2.61% 2.73% 4.62% (e)
Portfolio turnover rate........................................ 75% 138% 31%
Average commission rate paid (f)............................... $.0579 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
---------------------------------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 15, 1994(a)
------------------------------ TO
1996 1995 DECEMBER 31, 1994
--------- ---------- ----------------------
<S> <C> <C> <C>
Net asset value, beginning of period.............................. $ 14.23 $ 10.53 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)...................................... .06 (c) .17 (c) .03 (c)
Net realized and unrealized gain on investments................ 3.95 3.54 .50
--------- ---------- ---------
Net increase in net asset value from operations................ 4.01 3.71 .53
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income........................... (.04) (.01) -0-
Distributions from net realized gains.......................... (.28) -0- -0-
--------- ---------- ---------
Total dividends and distributions.............................. (.32) (.01) -0-
--------- ---------- ---------
Net asset value, end of period................................. $ 17.92 $ 14.23 $ 10.53
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)........... 28.49% 35.23% 5.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)...................... $138,688 $45,220 $5,492
Ratio to average net assets of:
Expenses, net of waivers and reimbursements.................. .93% .95% .95% (e)
Expenses, before waivers and reimbursements.................. .93% 1.27% 4.19% (e)
Net investment income........................................ .35% 1.31% 1.17% (e)
Portfolio turnover rate........................................ 98% 86% 25%
Average commission rate paid (f)............................... $.0578 -0- -0-
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-78
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WORLDWIDE PRIVATIZATION PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 23, 1994(a)
------------------------------ TO
1996 1995 DECEMBER 31, 1994
--------- ---------- ---------------------
<S> <C> <C> <C>
Net asset value, beginning of period................................... $ 11.17 $ 10.10 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................................... .28 (c) .32 (c) .10 (c)
Net realized and unrealized gain on investments..................... 1.78 .78 -0-
--------- ---------- ---------
Net increase in net asset value from operations..................... 2.06 1.10 .10
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................ (.10) (.03) -0-
Distributions from net realized gains............................... -0- -0- -0-
--------- ---------- ---------
Total dividends and distributions................................... (.10) (.03) -0-
--------- ---------- ---------
Net asset value, end of period...................................... $ 13.13 $ 11.17 $ 10.10
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)................ 18.51% 10.87% 1.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........................... $18,807 $5,947 $1,127
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....................... .95% .95% .95% (e)
Expenses, before waivers and reimbursements....................... 1.85% 4.17% 18.47% (e)
Net investment income............................................. 2.26% 2.96% 4.27% (e)
Portfolio turnover rate............................................. 47% 23% 0%
Average commission rate paid (f).................................... $.0148 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
CONSERVATIVE INVESTORS PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31, OCTOBER 28, 1994(a)
------------------------------- TO
1996 1995 DECEMBER 31, 1994
--------- ---------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period................................... $ 11.76 $ 10.07 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)........................................... .45 (c) .51 (c) .06 (c)
Net realized and unrealized gain (loss) on investments.............. (.01) (g) 1.20 .01
--------- ---------- ---------
Net increase in net asset value from operations..................... .44 1.71 .07
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income................................ (.09) (.02) -0-
Distributions from net realized gains............................... (.04) -0- -0-
--------- ---------- ---------
Total dividends and distributions................................... (.13) (.02) -0-
--------- ---------- ---------
Net asset value, end of period...................................... $ 12.07 $ 11.76 $ 10.07
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d)................ 3.79% 16.99% 0.70%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)........................... $21,729 $7,420 $701
Ratio to average net assets of:
Expenses, net of waivers and reimbursements....................... .95% .95% .95% (e)
Expenses, before waivers and reimbursements....................... 1.40% 4.25% 20.35% (e)
Net investment income............................................. 3.93% 4.65% 3.55% (e)
Portfolio turnover rate............................................. 211% 61% 2%
Average commission rate paid (f).................................... $.0578 -0- -0-
</TABLE>
- -------------------------------------------------------------------------------
See footnote summary on page B-81.
B-79
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH INVESTORS PORTFOLIO
-------------------------------------------------------
YEAR ENDED DECEMBER 31, OCTOBER 28, 1994(A)
------------------------------ TO
1996 1995 DECEMBER 31, 1994
--------- ---------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period............................. $ 11.87 $ 9.86 $ 10.00
--------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)..................................... .24 (c) .35 (c) .04 (c)
Net realized and unrealized gain (loss) on investments........ .72 1.67 (.18)
--------- ---------- ---------
Net increase (decrease) in net asset value from operations.... .96 2.02 (.14)
--------- ---------- ---------
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income.......................... (.07) (.01) -0-
Distributions from net realized gains......................... (.02) -0- -0-
--------- ---------- ---------
Total dividends and distributions............................. (.09) (.01) -0-
--------- ---------- ---------
Net asset value, end of period................................ $ 12.74 $ 11.87 $ 9.86
========= ========== =========
TOTAL RETURN
Total investment return based on net asset value (d).......... 8.18% 20.48% (1.40)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)..................... $10,709 $4,978 $321
Ratio to average net assets of:
Expenses, net of waivers and reimbursements................. .95% .95% .95% (e)
Expenses, before waivers and reimbursements................. 1.85% 6.17% 41.62% (e)
Net investment income....................................... 2.01% 3.21% 2.29% (e)
Portfolio turnover rate....................................... 160% 50% 3%
Average commission rate paid (f).............................. $.0562 -0- -0-
</TABLE>
<TABLE>
<CAPTION>
TECHNOLOGY PORTFOLIO QUASAR PORTFOLIO
JANUARY 11, 1996(A) AUGUST 5, 1996(A)
TO DECEMBER 31, 1996 TO DECEMBER 31, 1996
-------------------- --------------------
<S> <C> <C>
Net asset value, beginning of period............................. $ 10.00 $ 10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b)..................................... .11 (c) .04 (c)
Net realized and unrealized gain on investments............... .93 .60
--------- ---------
Net increase in net asset value from operations............... 1.04 .64
--------- ---------
Net asset value, end of period................................ $ 11.04 $ 10.64
========= =========
TOTAL RETURN
Total investment return based on net asset value (d).......... 10.40% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)..................... $28,083 $8,842
Ratio to average net assets of:
Expenses, net of waivers and reimbursements................. .95% (e) .95% (e)
Expenses, before waivers and reimbursements................. 1.62% (e) 4.44% (e)
Net investment income......................................... 1.17% (e) .93% (e)
Portfolio turnover rate....................................... 22% 40%
Average commission rate paid (f).............................. $.0553 $.0511
</TABLE>
- -------------------------------------------------------------------------
See footnote summary on page B-81.
B-80
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
- -------------------------------------------------------------------------------
FOOTNOTE SUMMARY:
(a) Commencement of operations.
(b) Net of expenses reimbursed or waived by the investment adviser.
(c) Based on average shares outstanding.
(d) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Total investment return
calculated for a period of less than one year is not annualized.
(e) Annualized.
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
(g) The amount shown in this caption for a share outstanding throughout the
period may not accord with the change in realized and unrealized gains and
losses in the portfolio securities for the period because of timing of
sales and repurchases of portfolio shares in relation to fluctuating
market values for the portfolio.
B-81
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of Alliance Variable Products Series
Fund, Inc. (the "Fund"), (comprising, respectively, Premier Growth, Global
Bond, Growth and Income, Short-Term Multi-Market, U.S. Government/High Grade
Securities, Total Return, International, Money Market, Global Dollar
Government, North American Government Income, Utility Income, Growth, Worldwide
Privatization, Conservative Investors, Growth Investors, Technology and Quasar
Portfolios), as of December 31, 1996, and the related statements of operations
for the year then ended, and the statements of changes in net assets and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian and brokers
or other appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Portfolios constituting Alliance Variable Products Series
Fund, Inc. at December 31, 1996, the results of their operations for the year
then ended, and the changes in their net assets and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
Ernst & Young
New York, New York
February 7, 1997
- -------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The following Portfolios of the Fund hereby designate the respective amounts
per share as long-term capital gain distributions during the taxable year ended
December 31, 1996:
<TABLE>
<CAPTION>
PER SHARE
---------
<S> <C>
Premier Growth $ 2.48
Global Bond $ .06
Growth and Income $ 1.14
U.S. Government/High Grade Securities $ .02
Total Return $ .01
International $ .05
Global Dollar $ .01
Utility $ .01
Growth $ .03
Conservative Investors $ .00
Growth Investors $ .01
</TABLE>
B-82
201
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997 (Unaudited)
Assets
Investments in securities, at value
(cost $2,339,516) $2,313,925
Cash
Deferred organization expenses 515
Dividends receivable 19,101
Receivable from investment adviser 9,132
Interest receivable 3,995
Total assets 29
2,346,698
Liabilities
Payable for investment securities purchased 50,681
Accrued expenses 27,727
Total liabilities 78,408
Net Assets $2,268,290
==========
Composition of Net Assets
Capital stock, at par $223
Additional paid-in capital 2,281,256
Undistributed net investment income 12,402
Net unrealized depreciation of investments (25,591)
$2,268,290
==========
Shares of capital stock outstanding 223,382
Net asset value per share $10.15
==========
See Notes to Financial Statements.
202
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
STATEMENT OF OPERATIONS
January 9, 1997* to March 31, 1997
(Unaudited)
Investment Income
Dividends $13,153
Interest 1,471
Total investment income 14,624
Expenses
Investment advisory fee 2,105
Custodian 13,365
Amortization of organization expenses 898
Total Expenses 16,368
Less: expense reimbursement (14,146)
Net expenses 2,222
Net investment income 12,402
Realized and Unrealized Loss
on Investments
Net unrealized depreciation
of investments (25,591)
Net Decrease in Net Assets
from Operations ($13,189)
========
* Commencement of operations.
See Notes to Financial Statements.
203
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
January 9, 1997*
to
March 31, 1997
Increase (Decrease) in Net Assets
from Operations
Net investment income $ 12,402
Net unrealized depreciation of
investments (25,591)
Net decrease in net assets from
operations (13,189)
Dividends and Distributions to
Shareholders From:
Net investment income 0
Net realized gain on investments 0
Capital Stock Transactions
Net increase 2,281,479
Total increase 2,268,290
Net Assets
Beginning of period 0
End of period (including undistributed
net investment income of $12,402) $2,268,290
==========
* Commencement of operations.
See Notes to Financial Statements.
204
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
PORTFOLIO OF INVESTMENTS
March 31, 1997 (Unaudited)
_______________________________________________________________
Shares or
Principal
Amount U.S.
000 $ Value
COMMON STOCKS--93.2%
REAL ESTATE INVESTMENTS
TRUSTS--90.1%
APARTMENTS--13.0%
Ambassador Apartments, Inc. 2,700 $67,500
Avalon Properties, Inc. 2,000 55,000
Bay Apartment Communities, Inc. 2,400 86,100
Essex Property Trust, Inc. 2,900 86,638
295,238
HOTELS & RESTAURANTS--14.5%
American General Hospitality Corp. 2,600 70,850
Innkeepers USA Trust 5,200 76,050
Patriot American Hospitality, Inc. 3,300 80,025
Starwood Lodging Trust 2,600 101,400
328,325
OFFICE - INDUSTRIAL--14.2%
Arden Realty Group, Inc. 2,500 68,125
Beacon Properties Corp. 2,500 82,813
Crescent Real Estate Equities Co. 3,600 96,300
Highwoods Properties, Inc. 2,200 73,700
320,938
OFFICE - MIX--13.9%
Brandywine Realty Trust 3,500 70,875
Duke Realty Investments, Inc. 2,100 85,312
Kilroy Realty Corp* 600 15,975
Reckson Associates Realty Corp. 1,600 73,800
Spieker Properties, Inc. 1,800 70,200
316,162
REGIONAL MALLS--4.9%
J.P. Realty, Inc. 2,500 66,250
Simon DeBartolo Group, Inc. 1,500 45,375
111,625
205
<PAGE>
SHOPPING CENTERS--9.5%
Developers Diversified Realty Corp. 2,000 75,500
Excel Realty Trust, Inc. 3,600 90,900
IRT Property Co. 4,400 48,400
214,800
STORAGE--6.8%
Public Storage, Inc. 2,400 69,600
Storage USA, Inc. 2,300 84,812
154,412
WAREHOUSE & INDUSTRIAL--7.1%
Meridian Industrial Trust, Inc. 3,200 74,000
Security Capital Industrial Trust 4,200 87,675
161,675
DIVERSIFIED--6.2%
Glenborough Realty Trust, Inc. 4,800 96,000
Golf Trust American, Inc. 400 9,750
Pacific Gulf Properties, Inc. 1,600 34,800
140,550
2,043,725
REAL ESTATE DEVELOPMENT &
MANAGEMENT--3.1%
Rouse Co. 2,400 70,200
Total Common Stocks (cost $2,139,516) 2,113,925
SHORT-TERM INVESTMENTS--8.8%
TIME DEPOSIT--8.8%
State Street Bank and Trust Co.
5.25%, 04/01/97
(Amortized cost $200,000) 200 200,000
TOTAL INVESTMENTS--102.0%
(Cost/Amortized cost $2,339,516) 2,313,925
Other assets less liabilities--(2.0%) (45,635)
NET ASSETS--100% $2,268,290
==========
______________________________________
* Non-income producing security.
See Notes to Financial Statements.
206
<PAGE>
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (Unaudited)
NOTE A - Significant Accounting Policies
Alliance Variable Products Series Fund (the "Fund"), was
incorporated in the state of Maryland on November 17, 1987 as an
open-end series investment company. The Fund has no operations
prior to November 28, 1990. The Real Estate Investment Portfolio
(the "Portfolio") is one of eighteen separately managed pools of
assets which have differing investment objectives and policies.
The Portfolio commenced operations on January 9, 1997 with an
initial share value of $10.00.
The Real Estate Investment Portfolio seeks a total return on its
assets from long-term growth of capital and from income
principally through investing in a portfolio of equity securities
of issuers that are primarily engaged in or related to the real
estate industry.
The Fund offers and sells its shares only to separate accounts of
certain life insurance companies, for the purpose of funding
variable annuity contracts and variable life insurance policies.
Sales are made without a sales charge, at each Portfolio's net
asset value per share.
The following is a summary of significant accounting policies
followed by the Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange are
valued at the last sale price on such exchange at the day of
valuation or, if no sale on such day, the last bid price quoted
on such day. Listed securities not traded and securities traded
in the over-the-counter, are valued at the mean between the most
recent quoted bid and asked prices provided by the principal
market makers. Securities for which current market quotations
are not readily available are valued at fair value as determined
in good faith by the Board of Directors. Securities which mature
in 60 days or less are valued at amortized cost, which
approximates market value, unless this method does not represent
fair value.
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2. Organization Expenses
Organization costs of approximately $20,000 have been deferred
and are being amortized on a straight-line basis through January,
2002.
3. Taxes
It is the Fund's policy to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net
realized gains, if applicable, to shareholders. Therefore, no
provisions for federal income or excise taxes are required.
4. Investment Income and Security Transactions
Dividend income is recorded on the ex-dividend date. Interest
income is accrued daily. Security transactions are accounted for
on the date securities are purchased or sold. Security gains and
losses are determined on the identified cost basis. The Fund
accretes discounts as adjustments to interest income.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the
ex-dividend date and are determined in accordance with income tax
regulations.
_______________________________________________________________
NOTE B - Advisory Fee and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Real
Estate Investment Portfolio pays Alliance Capital Management
L.P., ("the Adviser"), an investment advisory fee, based on
average net assets at the rate of .90% of 1%. Such fee is
accrued daily and paid monthly.
The Adviser voluntarily agreed to reimburse the Portfolio based
on its average net assets for expenses exceeding .95%. Expense
reimbursements, if any, are accrued daily and paid monthly. For
the period ended March 31, 1997, the Portfolio was reimbursed in
the amount of $14,146.
The Portfolio compensates Alliance Fund Services, Inc. (a
wholly-owned subsidiary of the Adviser) for providing personnel
and facilities to perform transfer agency services for the Fund.
Brokerage commissions paid for the period ended March 31, 1997 on
securities transactions amounted to $3,716 for the Real Estate
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Investment Portfolio, none of which was paid to affiliated
brokers.
_______________________________________________________________
NOTE C - Investment Transactions
Purchases and sales of investment securities (excluding short-
term investments) aggregated $2,139,516 and $-0-, respectively
for the period ended March 31, 1997. At March 31, 1997, the cost
of securities for federal income tax purposes was the same as the
cost for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $18,165 and gross
unrealized depreciation of investments was $43,756 resulting in
net unrealized depreciation of $25,591.
_______________________________________________________________
NOTE D - Capital Stock
There are 900,000,000 shares of capital stock, $.001 par value
per share of the Fund authorized. Transactions in capital stock
were as follows:
Real Estate Investment Portfolio
Shares Amount
January 9, 1997*
to
March 31, 1997
Shares sold 226,738 $2,315,852
Shares redeemed (3,356) (34,373)
Net increase (decrease) 223,382 $2,281,479
======== ===========
* Commencement of operations.
_______________________________________________________________
209
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ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
REAL ESTATE INVESTMENT PORTFOLIO
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding
Throughout The Period
Real Estate
Investment
Portfolio
January 9, 1997 (a)
to
March 31, 1997
(unaudited)
Net asset value, beginning of period $10.00
Income From Investment Operations
Net investment income (b) .10
Net unrealized gain on investments .05
Net increase in net assets value
from operations .15
Less: Dividends & Distributions
Dividends from net investment income -0-
Distributions from net realized gains -0-
Total dividends and distributions -0-
Net asset value, end of period $10.15
======
Total Return
Total investment return based on net asset
value (c) 1.50%
Ratio/Supplemental Data
Net assets, end of period (000's omitted) $2,268
Ratio to average net assets of:
Expenses, net of waivers and
reimbursements .95%
Expenses, before waivers and
reimbursements 6.99%
Net investment income 1.18%
Portfolio turnover rat -0-
Average commission rate paid $-0-
(a) Commencement of operations.
(b) Net of expenses reimbursed by the investment adviser.
(c) Based on average shares outstanding.
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APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
STANDARD & POOR's BOND RATINGS
A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to
a specific obligation. Debt rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. Debt
rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
a debt of a higher rated category. Debt rated "BBB" is regarded
as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to
pay interest and to repay principal for debt in this category
than for higher rated categories.
Debt rated "BB," "B," "CCC" or "CC" is regarded, on
balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal is in
arrears.
The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
MOODY's BOND RATINGS
Excerpts from Moody's description of its corporate bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher medium grade obligations; Baa
- - considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C--protection of
interest and principal payments is questionable; Ba indicates
A-1
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some speculative elements while Ca represents a high degree of
speculation and C represents the lowest rated class of bonds;
Caa, Ca and C bonds may be in default. Moody's applies numerical
modifiers 1, 2 and 3 in each generic rating classification from
Aa to B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
FITCH INVESTORS SERVICE BOND RATINGS
AAA. Securities of this rating are regarded as strictly
high-grade, broadly marketable, suitable for investment by
trustees and fiduciary institutions, and liable to but slight
market fluctuation other that through changes in the money rate.
The factor last named is of importance varying with the length of
maturity. Such securities are mainly senior issues of strong
companies, and are most numerous in the railway and public
utility fields, though some industrial obligations have this
rating. The prime feature of an AAA rating is showing of
earnings several times or many times interest requirements with
such stability of applicable earnings that safety is beyond
reasonable question whatever changes occur in conditions. Other
features may enter in, such as a wide margin of protection
through collateral security or direct lien on specific property
as in the case of high class equipment certificates or bonds that
are first mortgages on valuable real estate. Sinking funds or
voluntary reduction of the debt by call or purchase are often
factors, while guarantee or assumption by parties other than the
original debtor may also influence the rating.
AA. Securities in this group are of safety virtually
beyond question, and as a class are readily salable while many
are highly active. Their merits are not greatly unlike those of
the AAA class, but a security so rated may be of junior through
strong lien -- in many cases directly following an AAA security -
- - or the margin of safety is less strikingly broad. The issue
may be the obligation of a small company, strongly secured but
influenced as to ratings by the lesser financial power of the
enterprise and more local type of market.
A. A securities are strong investments and in many
cases of highly active market, but are not so heavily protected
as the two upper classes or possibly are of similar security but
less quickly salable. As a class they are more sensitive in
standing and market to material changes in current earnings of
the company. With favoring conditions such securities are likely
to work into a high rating, but in occasional instances changes
cause the rating to be lowered.
A-2
<PAGE>
BBB. BBB rated bonds are considered to be investment
grade and of satisfactory quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds with
higher ratings.
STANDARD & POOR's COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category
utilized by S&P, which uses the number 1+, 1, 2 and 3 to denote
relative strength within its A classification. Commercial paper
issues rated A by S&P have the following characteristics:
Liquidity ratios are better than industry average, long-term debt
rating is A or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow
are in an upward trend. Typically, the issuer is a strong
company in a well-established industry and has superior
management. Issues rated "B" are regarded as having only an
adequate capacity for timely payment. However, such capacity may
be damaged by changing conditions or short-term adversities. The
rating "C" is assigned to short-term debt obligations with a
doubtful capacity for repayment. An issue rated "D" is either in
default or is expected to be in default upon maturity.
MOODY's COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting
institutions) have a superior capacity for repayment of short-
term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: Leading
market positions in well established industries; high rates of
return on funds employed; conservative capitalization structures
with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high
internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting
institutions) have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting
institutions) have an acceptable capacity for repayment of short-
term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced.
A-3
<PAGE>
Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement
for relatively high financial leverage. Adequate alternate
liquidity is maintained.
The rating category Not Prime encompasses all other
rated commercial paper issuers.
COMMERCIAL PAPER RATINGS OF FITCH INVESTORS SERVICES, INC.
AND DUFF & PHELPS INC.
Commercial paper rated "Fitch-1" is considered to be the
highest grade paper and is regarded as having the strongest
degree of assurance for timely payment. "Fitch-2" is considered
very good grade paper and reflects an assurance of timely payment
only slightly less in degree than the strongest issue.
Commercial paper carrying the "Fitch-3" rating is considered to
be good grade paper having a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as the
two higher categories. "Fitch-4" is considered poor grade paper
having characteristics suggesting that the degree of assurance
for timely payment is minimal and is susceptible to near-term
adverse change due to less favorable financial economic
conditions.
Commercial paper issues rated "Duff 1" by Duff & Phelps
Inc. have the following characteristics: very high certainty of
timely payment, excellent liquidity factors supported by good
fundamental protection factors, and risk factors which are minor.
Issues rated "Duff 2" have a good certainty of timely payment,
sound liquidity factors and company fundamentals, small risk
factors, and good access to capital markets. Commercial paper
issues rated "Duff 3" have satisfactory liquidity and other
protection factors which qualify them as investment grade issue.
Although the risk factors associated with these issues are larger
and subject to more variation, timely payment is expected.
Issues rated "Duff 4" are considered to be non-investment grade
and have speculative investment characteristics, liquidity
insufficient to insure against disruption in debt service, and
operating factors and market access subject to a high degree of
variation. Issuers of commercial paper issues rated "Duff 5" are
considered to be in default and have failed to meet scheduled
principal and/or interest payments.
A-4
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED
BY U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS--are bonds
issued by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration, an
independent agency of the U.S. Government. These bonds are not
guaranteed by the U.S. Government.
MARITIME ADMINISTRATION BONDS--are bonds issued and
provided by the Department of Transportation of the U.S.
Government and are guaranteed by the U.S. Government.
FHA DEBENTURES--are debentures issued by the Federal
Housing Administration of the U.S. Government and are guaranteed
by the U.S. Government.
GNMA CERTIFICATES--are mortgage-backed securities which
represent a partial ownership interest in a pool of mortgage
loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan
included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
FHLMC BONDS--are bonds issued and guaranteed by the
Federal Home Loan Mortgage Corporation.
FNMA BONDS--are bonds issued and guaranteed by the
Federal National Mortgage Association.
FEDERAL HOME LOAN BANK NOTES AND BONDS--are notes and
bonds issued by the Federal Home Loan Bank System and are not
guaranteed by the U.S. Government.
STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES
AND BONDS--are notes and bonds issued by the Student Loan
Marketing Association.
Although this list includes a description of the primary
types of U.S. Government agency or instrumentality obligations in
which certain Portfolios of the Fund intends to invest,
Portfolios may invest in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
B-1
<PAGE>
APPENDIX C
FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS AND FOREIGN CURRENCIES
FUTURES CONTRACTS
Portfolios of the Fund may enter into contracts for the
purchase or sale for future delivery of fixed-income securities
or foreign currencies, or contracts based on financial or stock
indices including any index of U.S. Government Securities,
Foreign Government Securities, corporate debt securities or
common stock. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, a Portfolio must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1 1/2%-5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Portfolio would provide or receive cash that reflects any decline
or increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
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<PAGE>
contracts are traded, a Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
INTEREST RATE FUTURES
The purpose of the acquisition or sale of a futures
contract, in the case of a portfolio, such as a Portfolio of the
Fund, which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in
interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currency. For
example, if interest rates were expected to increase, the
Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the
Portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the
futures contracts to the Portfolio would increase at
approximately the same rate, thereby keeping the net asset value
of the Portfolio from declining as much as it otherwise would
have. The Portfolio could accomplish similar results by selling
debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of
futures contracts as an investment technique allows a Portfolio
to maintain a defensive position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, the Portfolio
could take advantage of the anticipated rise in the value of debt
securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be
liquidated and the Portfolio could then buy debt securities on
the cash market. To the extent a Portfolio enters into futures
contracts for this purpose, the assets in the segregated asset
account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash
equivalents or high quality liquid debt securities (or, in the
case of the North American Government Income Portfolio, Global
Dollar Government Portfolio and Utility Income Portfolio, high
grade liquid debt securities) from its portfolio in an amount
equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to
such futures contracts.
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<PAGE>
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Portfolio believes that use of such contracts will benefit
the Portfolio, if the Adviser's investment judgment about the
general direction of interest rates is incorrect, the Portfolio's
overall performance would be poorer than if it had not entered
into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which
would adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Portfolio will
lose part or all of the benefit of the increased value of its
debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have
to sell debt securities from its portfolio to meet daily
variation margin requirements. Such sales of bonds may be, but
will not necessarily be, at increased prices which reflect the
rising market. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
STOCK INDEX FUTURES
A Portfolio may purchase and sell stock index futures as
a hedge against movements in the equity markets. There are
several risks in connection with the use of stock index futures
by a Portfolio as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the
stock index futures and movements in the price of the securities
which are the subject of the hedge. The price of the stock index
futures may move more than or less than the price of the
securities being hedged. If the price of the stock index futures
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<PAGE>
moves less than the price of the securities which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being
hedged has moved in a favorable direction, this advantage will be
partially offset by the loss on the index future. If the price
of the future moves more than the price of the stock, the
Portfolio will experience either a loss or gain on the future
which will not be completely offset by movements in the price of
the securities which are subject to the hedge. To compensate for
the imperfect correlation of movements in the price of securities
being hedged and movements in the price of the stock index
futures, the Portfolio may buy or sell stock index futures
contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time
period of the prices of such securities has been greater than the
volatility over such time period of the index, or if otherwise
deemed to be appropriate by the Adviser. Conversely, the
Portfolio may buy or sell fewer stock index futures contracts if
the volatility over a particular time period of the prices of the
securities being hedged is less than the volatility over such
time period of the stock index, or it is otherwise deemed to be
appropriate by the Adviser It is also possible that, where the
Portfolio has sold futures to hedge its portfolio against a
decline in the market, the market may advance and the value of
securities held in the Portfolio may decline. If this occurred,
the Portfolio would lose money on the futures and also experience
a decline in value in its portfolio securities. However, over
time the value of a diversified portfolio should tend to move in
the same direction as the market indices upon which the futures
are based, although there may be deviations arising from
differences between the composition of the Portfolio and the
stocks comprising the index.
Where futures are purchased to hedge against a possible
increase in the price of stock before the Portfolio is able to
invest its cash (or cash equivalents) in stocks (or options) in
an orderly fashion, it is possible that the market may decline
instead. If the Portfolio then concludes not to invest in stock
or options at that time because of concern as to possible further
market decline or for other reasons, the Portfolio will realize a
loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In addition the possibility that there may be an
imperfect correlation, or no correlation at all, between
movements in the stock index futures and the portion of the
portfolio being hedged, the price of stock index futures may not
correlate perfectly with movement in the stock index due to
certain market distortions. Rather than meeting additional
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<PAGE>
margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the
normal relationship between the index and futures markets.
Secondly, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price
distortion in the futures market, and because of the imperfect
correlation between the movements in the stock index and
movements in the price of stock index futures, a correct forecast
of general market trends by the investment adviser may still not
result in a successful hedging transaction over a short time
frame.
Positions in stock index futures may be closed out only
on an exchange or board of trade which provides a secondary
market for such futures. Although the Portfolios intend to
purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board
of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close
a futures investment position, and in the event of adverse price
movements, the Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event
futures contracts have been used to hedge portfolio securities,
such securities will not be sold until the futures contract can
be terminated. In such circumstances, an increase in the price
of the securities, if any, may partially or completely offset
losses on the futures contract. However, as described above,
there is no guarantee that the price of the securities will in
fact correlate with the price movements in the futures contract
and thus provide an offset on a futures contract.
The Adviser intends to purchase and sell futures
contracts on the stock index for which it can obtain the best
price with due consideration to liquidity.
OPTIONS ON FUTURES CONTRACTS
Portfolios of the Fund intend to purchase and write
options on futures contracts for hedging purposes. None of the
Portfolios is a commodity pool and all transactions in futures
contracts engaged in by a Portfolio must constitute bona fide
hedging or other permissible transactions in accordance with the
rules and regulations promulgated by the CFTC. The purchase of a
call option on a futures contract is similar in some respects to
the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the
price of the futures contract upon which it is based or the price
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<PAGE>
of the underlying debt securities, it may or may not be less
risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when a
Portfolio is not fully invested it may purchase a call option on
a futures contract to hedge against a market advance due to
declining interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
security or foreign currency which is deliverable upon exercise
of the futures contract or securities comprising an index. If
the futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any decline
that may have occurred in the Portfolio's portfolio holdings.
The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or
foreign currency which is deliverable upon exercise of the
futures contract or securities comprising an index. If the
futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any
increase in the price of securities which the Portfolio intends
to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be
reduced by the amount of the premium it receives. Depending on
the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in
the value of portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Portfolio may
purchase a put option on a futures contract to hedge the
Portfolio's portfolio against the risk of rising interest rates.
The amount of risk the Portfolio assumes when it
purchases an option on a futures contract is the premium paid for
the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also
entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the
option purchased.
OPTIONS ON FOREIGN CURRENCIES
Portfolios of the Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to
that in which futures contracts on foreign currencies, or forward
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contracts, will be utilized. For example, a decline in the
dollar value of a foreign currency in which portfolio dollar
value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of
portfolio securities, the Portfolio may purchase put options on
the foreign currency. If the value of the currency does decline,
the Portfolio will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would
have resulted.
Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is
projected, thereby increasing the cost of such securities, the
Portfolio may purchase call options thereon. The purchase of
such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Portfolio deriving
from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could
sustain losses on transactions in foreign currency options which
would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Portfolios of the Fund may write options on foreign
currencies for the same types of hedging purposes. For example,
where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a
put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge
against an anticipated increase in the dollar cost of securities
to be acquired, the Portfolio could write a put option on the
relevant currency which, if rates move in the manner projected,
will expire unexercised and allow the Portfolio to hedge such
increased cost up to the amount of the premium. As in the case
of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised
and the Portfolio would be required to purchase or sell the
underlying currency at a loss which may not be offset by the
amount of the premium. Through the writing of options on foreign
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currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
Portfolios of the Fund intend to write covered call
options on foreign currencies. A call option written on a
foreign currency by a Portfolio is "covered" if the Portfolio
owns the underlying foreign currency covered by the call or has
an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash
consideration held in a segregated account by the Fund's
Custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the
Portfolio has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of
the call written or (b) is greater than the exercise price of the
call written if the difference is maintained by the Portfolio in
cash, U.S. Government Securities and other high grade liquid debt
securities in a segregated account with the Fund's Custodian.
Portfolios of the Fund also intend to write call options
on foreign currencies that are not covered for cross- hedging
purposes. A call option on a foreign currency is for cross-
hedging purposes if it is not covered, but is designed to provide
a hedge against a decline in the U.S. dollar value of a security
which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an
adverse change in the exchange rate. In such circumstances, the
Portfolio collateralizes the option by maintaining in a
segregated account with the Fund's Custodian, cash or U.S.
Government Securities or other high quality liquid debt
securities (or, in the case of the North American Government
Income Portfolio and the Utility Income Portfolio, high grade
liquid debt securities) in an amount not less than the value of
the underlying foreign currency in U.S. dollars marked to market
daily.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS,
FORWARD CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Unlike transactions entered into by a Portfolio in
futures contracts, options on foreign currencies and forward
contracts are not traded on contract markets regulated by the
CFTC or (with the exception of certain foreign currency options)
by the Commission. To the contrary, such instruments are traded
through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national
securities exchanges, such as the Philadelphia Stock Exchange and
the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter.
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In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of forward
contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national
securities exchanges are within the jurisdiction of the SEC, as
are other securities traded on such exchanges. As a result, many
of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on
a national securities exchange are cleared and guaranteed by the
Options Clearing Corporation ("OCC"), thereby reducing the risk
of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more
readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at
a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
The purchase and sale of exchange-traded foreign
currency options, however, is subject to the risks of the
availability of a liquid secondary market described above, as
well as the risks regarding adverse market movements, margining
of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects
of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise
and settlement of such options must be made exclusively through
the OCC, which has established banking relationships in
applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on the OCC or
its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or
prohibitions, on exercise.
In addition, futures contracts, options on futures
contracts, forward contracts and options on foreign currencies
may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in
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or the prices of foreign currencies or securities. The value of
such positions also could be adversely affected by (i) other
complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio's ability to act
upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lesser trading
volume.
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APPENDIX D
OPTIONS
Portfolios of the Fund will only write "covered" put and
call options, unless such options are written for cross-hedging
purposes. The manner in which such options will be deemed
"covered" is described in the Prospectus under the heading "Other
Investment Policies and Techniques -- Options."
The writer of an option may have no control over when
the underlying securities must be sold, in the case of a call
option, or purchased, in the case of a put option, since with
regard to certain options, the writer may be assigned an exercise
notice at any time prior to the termination of the obligation.
Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount, of course, may, in the
case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option
is exercised, the writer must fulfill the obligation to purchase
the underlying security at the exercise price, which will usually
exceed the then market value of the underlying security.
The writer of a listed option that wishes to terminate
its obligation may effect a "closing purchase transaction." This
is accomplished by buying an option of the same series as the
option previously written. The effect of the purchase is that
the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of a listed option may
liquidate its position by effecting a "closing sale transaction".
This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written
call option will permit the Portfolio to write another call
option on the underlying security with either a different
exercise price or expiration date or both, or in the case of a
written put option will permit the Portfolio to write another put
option to the extent that the exercise price thereof is secured
by deposited cash or short-term securities. Also, effecting a
closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be
used for other Portfolio investments. If the Portfolio desires
to sell a particular security from its portfolio on which it has
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written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
A Portfolio will realize a profit from a closing
transaction if the price of the transaction is less than the
premium received from writing the option or is more than the
premium paid to purchase the option; the Portfolio will realize a
loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option or is
less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally
reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the
underlying security owned by the Portfolio.
An option position may be closed out only where there
exists a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing transactions in particular options with the result
that the Portfolio would have to exercise the options in order to
realize any profit. If the Portfolio is unable to effect a
closing purchase transaction in a secondary market, it will not
be able to sell the underlying security until the option expires
or it delivers the underlying security upon exercise. Reasons
for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in
certain options, (ii) restrictions may be imposed by a national
securities exchange ("Exchange") on opening transactions or
closing transactions or both, (iii) trading halts, suspensions or
other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv)
unusual or unforeseen circumstances may interrupt normal
operations on an Exchange, (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate
to handle current trading volume, or (vi) one or more Exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options on
that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue
to be exercisable in accordance with their terms.
A Portfolio may write options in connection with buy-
and-write transactions; that is, the Portfolio may purchase a
security and then write a call option against that security. The
exercise price of the call the Portfolio determines to write will
depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-
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the-money"), equal to ("at-the-money") or above ("out-of-the-
money") the current value of the underlying security at the time
the option is written. Buy-and-write transactions using in-the-
money call options may be used when it is expected that the price
of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-
the-money call options may be used when it is expected that the
price of the underlying security will remain fixed or advance
moderately during the option period. Buy-and-write transactions
using out- of-the-money call options may be used when it is
expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the
Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the
difference between the Portfolio's purchase price of the security
and the exercise price. If the options are not exercised and the
price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms
of risk/return characteristics to buy-and-write transactions. If
the market price of the underlying security rises or otherwise is
above the exercise price, the put option will expire worthless
and the Portfolio's gain will be limited to the premium received.
If the market price of the underlying security declines or
otherwise is below the exercise price, the Portfolio may elect to
close the position or take delivery of the security at the
exercise price and the Portfolio's return will be the premium
received from the put option minus the amount by which the market
price of the security is below the exercise price. Out-of-the-
money, at-the-money, and in-the-money put options may be used by
the Portfolio in the same market environments that call options
are used in equivalent buy- and-write transactions.
A portfolio may purchase put options to hedge against a
decline in the value of its portfolio. By using put options in
this way, the Portfolio will reduce any profit it might otherwise
have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
A Portfolio may purchase call options to hedge against
an increase in the price of securities that the Portfolio
anticipates purchasing in the future. The premium paid for the
call option plus any transaction costs will reduce the benefit,
if any, realized by the Portfolio upon exercise of the option,
and, unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Portfolio.
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APPENDIX E: JAPAN
The information in this section is based on material
obtained by the Fund from various Japanese governmental and other
sources believed to be accurate but has not been independently
verified by the Fund or the Adviser. It is not intended to be a
complete description of Japan, its economy or the consequences of
investing in Japanese securities.
Japan, located in eastern Asia, consists of four main
islands: Hokkaido, Honshu, Kyushu and Shikoku, and many small
islands. Its population is approximately 125 million.
GOVERNMENT
The government of Japan is a representative democracy
whose principal executive is the Prime Minister. Japan's
legislature (known as the Diet) consists of two houses, the House
of Representatives (the lower house) and the House of Councillors
(the upper house).
POLITICS
From 1955 to 1993, Japan's government was controlled by
the Liberal Democratic Party (the "LDP"), the major conservative
party. In August 1993, after a main faction left the LDP over
the issue of political reform, a non-LDP coalition government was
formed consisting of centrist and leftist parties and was headed
by Prime Minister Morihiro Hosokawa. In April 1994, Mr. Hosokawa
resigned due to allegations of personal financial irregularities.
The coalition members thereafter agreed to choose as prime
minister the foreign minister, Tsutomu Hata. As a result of the
formation of a center-right voting bloc, however, the Japan
Socialist Party (the "JSP"), a leftist party, withdrew from the
coalition. Consequently, Mr. Hata's government was a minority
coalition, the first since 1955, and was therefore unstable. In
June 1994, Mr. Hata and his coalition were replaced by a new
coalition made up of the JSP (since renamed the "Social
Democratic Party (the "SDP")), the LDP and the small New Party
Sakigake (the "Sakigake"). This coalition, which surprised many
because of the historic rivalries between the LDP and the SDP,
was led by Tomiichi Murayama, the first Socialist prime minister
in 47 years. Mr. Murayama stepped down in January 1996 and was
succeeded as Prime Minister by Liberal Democrat Ryutaro
Hashimoto. By September 1996, when Prime Minister Hashimoto
called for a general election on October 20, 1996, the stability
of the SDP-LDP-Sakigake coalition had become threatened. Both
the SDP and the Sakigake had lost more than half their seats in
the lower house of the Diet when a faction of the Sakigake split
off to form the Democratic Party of Japan. Their strength was
further diminished as a result of the October 20, 1996 general
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election. Although the LDP narrowly failed to win a majority in
the election, it has been able to achieve enough support from its
two former coalition parties, the SDP and the Sakigake, as well
as independents and other conservatives, to return Japan to a
single-party government for the first time since 1993. Mr.
Hashimoto was reappointed as Prime Minister on November 7, 1996.
The opposition is dominated by the New Frontier Party, which was
established in December 1994 by various opposition groups and
parties.
ECONOMY
The Japanese economy maintained an average annual growth
rate of 2.1% in real GDP terms from 1990 through 1994, compared
with 2.4% for the United States during the same period. In 1995,
Japan's real GDP growth was less than 1% for the third
consecutive year. During the first, second and third quarters of
1996, Japan's real GDP growth rates were 2.0%, -0.3% and 0.1%,
respectively. The government has predicted a 2.5% growth rate
for fiscal 1996 (April 1996 to March 1997) and a 1.9% growth rate
for fiscal 1997 (April 1997 to March 1998). Inflation has
remained low, 1.3% in 1993, 0.7% in 1994 and 0% in 1995.
Inflation in 1996 is estimated to have been less than 1%. It is
estimated that inflation in 1997 will be about 1%. Unemployment,
however, is still at its highest level in forty years and is not
expected to fall appreciably in the foreseeable future. In
addition, employment has been shifting from the manufacturing
sector to the service sector, a trend that was expected to
continue in 1996.
Japan's post World War II reliance on heavy industries
has shifted to higher technology products assembly and, most
recently, to automobile, electrical and electronic production.
Japan's success in exporting its products has generated sizable
trade surpluses. Japan is in a difficult phase in its relations
with its trading partners that is partly due to the concentration
of Japanese exports in products such as automobiles, machine
tools and semiconductors and the large trade surpluses ensuing
therefrom, recent large and visible Japanese real estate
investments in the United States and an overall trade imbalance
as indicated by Japan's balance of payments. Although it is
probable that the recent improvement of the United States economy
and an increased competitiveness and success in manufacturing,
such as with the U.S. automobile industry, has had a negative
effect on Japan's growth, Japan's overall trade surplus for 1994
was the largest in its history, amounting to almost $121 billion.
Exports totaled $396 billion, up 9.6% from 1993, and imports were
$275 billion, up 14.2% from 1993. The current account surplus in
1994 was $129 billion, down 2% from from a record high in 1993.
In 1995, Japan's overall trade surplus amounted to $107 billion.
Exports totaled $443 billion, up 11.9% from 1994, and imports
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were $336 billion, up 22.2% from 1994. In 1995, the current
account surplus decreased 27% to $94 billion. Japan's overall
trade surplus for the period from January 1 through October 31,
1996 amounted to $79 billion, exports totaled $388 billion and
imports totaled $309 billion. Japan remains the largest creditor
nation and a significant donor of foreign aid.
On October 1, 1994, the U.S. and Japan reached an
agreement that may lead to more open Japanese markets with
respect to insurance, glass and medical and telecommunications
equipment. In June 1995, the two countries agreed in principal
to increase Japanese imports of American automobiles and
automotive parts. The final wording of the agreement is
ambiguous, and therefore it is likely that this issue will
continue to be a source of tension between the two countries.
Other current sources of tension between the two countries, are
disputes in connection with trade in semiconductors and
photographic supplies, deregulation of the Japanese insurance
market and a dispute over aviation rights. It is expected that
the continuing friction between the United States and Japan with
respect to trade issues will continue for the foreseeable future.
In response to pressures caused by the slumping Japanese
economy, the fragile financial markets and the appreciating Yen,
the Japanese government, in April and June 1995, announced
emergency economic packages that focused on higher and
accelerated public works spending and increased aid for post-
earthquake reconstruction in the Kobe area. These measures
helped to increase public investment and lead to faster GDP
growth, but failed to produce fundamental changes.
In addition to the government's emergency economic
packages announced in 1995, the Bank of Japan attempted to assist
the financial markets by lowering its official discount rate to a
record low in 1995. However, large amounts of bad debt have
prevented banks from expanding their loan portfolios despite low
discount rates. Japanese banks have suffered six years of
declining profits and three of the four largest securities firms
reported unconsolidated pre-tax losses for 1994-1995. In
addition, many banks have required public funds to avert
insolvency. In June 1995, the Finance Ministry announced an
expansion of deposit insurance and restrictions on rescuing
insolvent banks.
In June 1996, six bills designed to address the large
amount of bad debt in the banking system were passed by the Diet.
Nevertheless, the financial system's fragility is expected to
continue for the foreseeable future. In November 1996, Prime
Minister Hashimoto announced a new set of initiatives to make
major changes in Japan's financial markets and regulations by the
year 2001.
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Projections for the size of the budget deficit will
likely result in a tightening of fiscal policy. Intense pressure
from the finance ministry to control and reduce the budget
deficit mitigates against the government utilizing a direct
fiscal stimulus package to keep the economy growing through 1997.
Instead, the emphasis will remain on monetary policy to keep the
economy growing.
Between 1985 and 1995, the Japanese Yen generally
appreciated against the U.S. Dollar. Between 1990 and 1994 the
Yen's real effective exchange rate appreciated by approximately
36%. On April 19, 1995, the Japanese Yen reached an all time
high of 79.75 against the U.S. Dollar. Since its peak of April
19, 1995, the Yen has decreased in value against the U.S. Dollar.
On January 21, 1997, the exchange rate was 117.88 Yen per Dollar
and on February 7, 1997 the exchange rate reached a four year low
of 124.71 Yen per U.S. Dollar.
JAPANESE STOCK EXCHANGES. Currently, there are eight
stock exchanges in Japan. The Tokyo Stock Exchange (the "TSE"),
the Osaka Securities Exchange and the Nagoya Stock Exchange are
the largest, together accounting for approximately 98.9% of the
share trading volume and for about 98.8% of the overall trading
value of all shares traded on Japanese stock exchanges during the
year ended December 31, 1996. The other stock exchanges are
located in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. The
chart below presents annual share trading volume (in millions of
shares) and overall year-end market value (in billions of yen)
information with respect to each of the three major Japanese
stock exchanges for the years 1989 through 1996. Trading volume
and the value of foreign stocks are not included.
All Exchanges TOKYO OSAKA NAGOYA
VOLUME VALUE VOLUME VALUE VOLUME VALUE VOLUME VALUE
______ ______ _____ _____ ______ _____ ______ _____
1989 256,296 386,395 222,599 332,617 25,096 41,679 7,263 10,395
1990 145,837 231,837 123,099 186,667 17,187 35,813 4,323 7,301
1991 107,844 134,160 93,606 110,897 10,998 18,723 2,479 3,586
1992 82,563 80,456 66,408 60,110 12,069 15,575 3,300 3,876
1993 101,173 106,123 86,935 86,889 10,440 14,635 2,780 3,459
1994 105,937 114,622 84,514 87,356 14,904 19,349 4,720 5,780
1995 120,149 115,840 92,034 83,564 21,094 24,719 5,060 5,462
1996 126,496 136,170 101,170 101,893 20,783 27,280 4,104 5,391
Source: The Tokyo Stock Exchange 1994, 1995 and 1996 Fact Books (for 1989-
1995 data); preliminary material from the 1997 Fact Book that will be
published in the Spring of 1997 (for 1996 data).
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THE TOKYO STOCK EXCHANGE
OVERVIEW OF THE TOKYO STOCK EXCHANGE. The TSE is the
largest of the Japanese stock exchanges and as such is widely
regarded as the principal securities exchange for all of Japan.
In 1996, the TSE accounted for 74.8% of the market value and
79.2% of the share trading volume on all Japanese stock
exchanges. A foreign stock section on the TSE, consisting of
shares of non-Japanese companies, listed 67 non-Japanese
companies at the end of 1996. The market for stock of Japanese
issuers on the TSE is divided into a First Section and a Second
Section. The First Section is generally for larger, established
companies (in existence for five years or more) that meet listing
criteria relating to the size and business condition of the
issuing company, the liquidity of its securities and other
factors pertinent to investor protection. The TSE's Second
Section is for smaller companies and newly listed issuers.
SECTOR ANALYSIS OF THE FIRST AND SECOND SECTIONS. The
TSE's domestic stocks include a broad cross-section of companies
involved in many different areas of the Japanese economy. At the
end of 1996, the three largest industry sectors, based on market
value, listed on the first section of the TSE were banking, with
100 companies representing 20.0% of all domestic stocks listed on
the TSE; electric appliances, with 129 companies representing
12.5% of all domestic stocks so listed; and transportation
equipment with 60 companies representing 9.6% of all domestic
stocks so listed. No other industry sector represented more than
5% of TSE listed domestic stocks.
MARKET GROWTH OF THE TSE. The First and Second Sections
of the TSE grew in terms of both average daily trading value and
aggregate year-end market value from 1982, when they were l28,320
million yen and 98,090 billion yen, respectively, through the end
of 1989, when they were 1,335,810 million yen and 611,152 billion
yen, respectively. Following the peak in 1989, both average
daily trading value and aggregate year-end market value declined
through 1992 when they were 243,362 million yen and 289,483
billion yen, respectively. In 1993 and 1994, both average daily
trading value and aggregate year-end market value increased and
were 353,208 and 353,666 million yen, respectively, and 324,357
and 358,392 billion yen, respectively. In 1995, average daily
trading value decreased to 335,598 million yen and aggregate
year-end market value increased to 365,716 billion yen. In 1996,
average daily trading volume increased to 412,521 million yen and
aggregate year-end market value decreased to 347,578 billion yen.
MARKET PERFORMANCE OF THE FIRST SECTION. As measured by
the TOPIX, a capitalization-weighted composite index of all
common stocks listed in the First Section, the performance of the
First Section reached a peak of 2,884.80 on December 18, 1989.
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Thereafter, the TOPIX declined approximately 45% through December
29, 1995. On December 30, 1996 the TOPIX closed at 1,470.94,
down approximately 7% from the end of 1995. On January 31, 1997,
the TOPIX closed at 1,372.48, down approximately 7% from the end
of 1996, after having fallen approximately 10% during the first
full week of trading in 1997. As of the end of the third quarter
of 1996, the TSE's average price/earnings ratio was substantially
higher than that of the stock markets of other developed
economies.
JAPANESE FOREIGN EXCHANGE CONTROLS
Under Japan's Foreign Exchange and Foreign Trade Control
Law and cabinet orders and ministerial ordinances thereunder (the
"Foreign Exchange Controls"), prior notification to the Minister
of Finance of Japan (the "Minister of Finance") of the
acquisition of shares in a Japanese company from a resident of
Japan (including a corporation) by a non-resident of Japan
(including a corporation) is required unless the acquisition is
made from or through a securities company designated by the
Minister of Finance or if the yen equivalent of the aggregate
purchase price of shares is not more than 100 million Yen. Even
in these situations, if a foreign investor intends to acquire
shares of a Japanese corporation listed on a Japanese stock
exchange or traded on a Japanese over-the-counter market
(regardless of the person from or through whom the foreign
investor acquires such shares) and as a result of the acquisition
the foreign investor would directly or indirectly hold 10% or
more of the total outstanding shares of that corporation, the
foreign investor must file a report within 15 days from the day
of such acquisition with the Minister of Finance and any other
minister with proper jurisdiction. In instances where the
acquisition concerns national security or meets certain other
conditions specified in the Foreign Exchange Controls, the
foreign investor must file a prior notification with respect to
the proposed acquisition with the Minister of Finance and any
other minister with proper jurisdiction. The ministers may make
a recommendation to modify or prohibit the proposed acquisition
if they consider that the acquisition would impair the safety and
maintenance of public order in Japan or harmfully influence the
smooth operation of the Japanese economy. If the foreign
investor does not accept the recommendation, the ministers may
issue an order modifying or prohibiting the acquisition. In
certain limited and exceptional circumstances, the Foreign
Exchange Controls give the Minister of Finance the power to
require prior approval for any acquisition of shares in a
Japanese company by a non-resident of Japan.
In general, the acquisition of shares by non-resident
shareholders by way of stock splits, as well as the acquisition
of shares of a Japanese company listed on a Japanese stock
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exchange by non-residents upon exercise of warrants or conversion
of convertible bonds, are not subject to any of the foregoing
notification or reporting requirements. Under the Foreign
Exchange Controls, dividends paid on share, held by non-residents
of Japan and the proceeds of any sales of shares within Japan
may, in general, be converted into any foreign currency and
remitted abroad.
REGULATION OF THE JAPANESE EQUITIES MARKETS
The principal securities law in Japan is the Securities
and Exchange Law ("SEL") which provides overall regulation for
the issuance of securities in public offerings and private
placements and for secondary market trading. The SEL was amended
in 1988 in order to liberalize the securities market; to regulate
the securities futures, index, and option trade; to add
disclosure regulations; and to reinforce the prevention of
insider trading. Insider trading provisions are applicable to
debt and equity securities listed on a Japanese stock exchange
and to unlisted debt and equity securities issued by a Japanese
corporation that has securities listed on a Japanese stock
exchange or registered with the Securities Dealers Association
(the "SDA"). In addition, each of the eight stock exchanges in
Japan has its own constitution, regulations governing the sale
and purchase of securities and standing rules for exchange
contracts for the purchase and sale of securities on the
exchange, as well as detained rules and regulations covering a
variety of matters, including rules and standards for listing and
delisting of securities.
The loss compensation incidents involving preferential
treatment of certain customers by certain Japanese securities
companies, which came to light in 1991, provided the impetus for
amendments to the SEL, which took effect in 1992, as well as two
reform bills passed by the Diet in 1992. The amended SEL now
prohibits securities companies from the operation of
discretionary accounts, loss compensation or provision of
artificial gains in securities transactions, directly or
indirectly, to their customers and making offers or agreements
with respect thereto. To ensure that securities are traded at
their fair value, the SDA and the TSE have promulgated certain
rules, effective in 1992, which, among other things, explicitly
prohibit any transaction undertaken with the intent to provide
loss compensation of illegal gains regardless of whether the
transaction otherwise technically complies with the rules. The
reform bill passed by the Diet, which took effect in 1992 and
1993, provides for the establishment of a new Japanese securities
regulator and for a variety of reforms designed to revitalize the
Japanese financial and capital markets by permitting banks and
securities companies to compete in each other's field of
business, subject to various regulations and restrictions.
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Investment in Japanese Issuers by All-Asia Investment
Fund and International Fund. Investment in securities of Japanese
issuers involves certain considerations not present with
investment in securities of U.S. issuers. As with any investment
not denominated in the U.S. dollar, the U.S. dollar value of each
Fund's investments denominated in the Japanese yen will fluctuate
with yen-dollar exchange rate movements. The Japanese yen has
generally been appreciating against the U.S. dollar for the past
decade but has fallen from its post-World War II high (in 1995)
against the U.S. dollar.
Japan's largest stock exchange is the Tokyo Stock
Exchange, the First Section of which is reserved for larger,
established companies. As measured by the TOPIX, a
capitalization-weighted composite index of all common stocks
listed in the First Section, the performance of the First Section
reached a peak in 1989. Thereafter, the TOPIX declined
approximately 50% through the end of 1993. In 1994, the TOPIX
closed at 1,559.09, up approximately 8% from the end of 1993; in
1995, the TOPIX closed at 1,577.70, up approximately 1% from the
end of 1994; and in 1996, the TOPIX closed at 1,470.94, down
approximately 7% from the end of 1995. On January 31, 1997, the
TOPIX closed at 1,372.48, down approximately 7% from the end of
1996, after having fallen approximately 10% during the first full
week of trading in 1997. Certain valuation measures, such as
price-to-book value and price-to-cash flow ratios, indicate that
the Japanese stock market is near its lowest level in the last
twenty years relative to other world markets. The price/earnings
ratios of First Section companies, however, are on average high
in comparison with other major stock markets.
In recent years, Japan has consistently recorded large
current account trade surpluses with the U.S. that have caused
difficulties in the relations between the two countries. On
October 1, 1994, the U.S. and Japan reached an agreement that may
lead to more open Japanese markets with respect to trade in
certain goods and services. In June 1995, the two countries
agreed in principle to increase Japanese imports of American
automobiles and automotive parts. Nevertheless it is expected
that the continuing friction between the U.S. and Japan with
respect to trade issues will continue for the foreseeable future.
Each Fund's investments in Japanese issuers will be
subject to uncertainty resulting from the instability of recent
Japanese ruling coalitions. From 1955 to 1993, Japan's government
was controlled by a single political party. Between August 1993
and October 1996 Japan was ruled by a series of four coalition
governments. As the result of a general election on October 20,
1996, however, Japan has returned to a single-party government
led by Prime Minister Ryutaro Hashimoto. Mr. Hashimoto's party,
however, does not control a majority of the seats in the
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parliament. For further information regarding Japan, see each
Fund's Statement of Additional Information.
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PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information for
the Premier Growth Portfolio, Global Bond Portfolio,
Growth and Income Portfolio, Short-Term Multi-Market
Portfolio, U.S. Government/High Grade Securities
Portfolio, Total Return Portfolio, International
Portfolio and the Money Market Portfolio:
Portfolio of Investments - December 31, 1996.
Statement of Assets and Liabilities -
December 31, 1996.
Statement of Operations - year ended December 31,
1996.
Statement of Changes in Net Assets - years ended
December 31, 1996 and December 31, 1995.
Notes to Financial Statements - December 31, 1996.
Financial Highlights - for the years ended
December 31, 1996, December 31, 1995,
December 31, 1994, December 31, 1993 and
December 31, 1992.
Report of Independent Auditors.
Included in the Statement of Additional Information for
the Global Dollar Government Portfolio, North American
Government Income Portfolio, Utility Income Portfolio,
Growth Portfolio, Worldwide Privatization Portfolio,
Conservative Investors Portfolio and Growth Investors
Portfolio:
Portfolio of Investments - December 31, 1996.
Statement of Assets and Liabilities -
December 31, 1996.
Statement of Operations - year ended December 31,
1996.
Statement of Changes in Net Assets - year ended
December 31, 1996 and December 31, 1995.
Notes to Financial Statements - December 31, 1996.
Financial Highlights - for the years ended
December 31, 1996, December 31, 1995 and
December 31, 1994.
Report of Independent Auditors.
Included in the Statement of Additional Information for
the Technology Portfolio and Quasar Portfolio:
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Portfolio of Investments - December 31, 1996.
Statement of Assets and Liabilities -
December 31, 1996.
Statement of Operations - period ended
December 31, 1996.
Statement of Changes in Net Assets - period
ended December 31, 1996.
Notes to Financial Statements - December 31, 1996.
Financial Highlights - for the period ended
December 31, 1996.
Report of Independent Auditors.
Included in the Statement of Additional Information for the
Real Estate Portfolio:
Portfolio of Investments - March 31, 1997 (unaudited).
Statement of Assets and Liabilities - March 31, 1997
(unaudited).
Statement of Operations - January 9, 1997
(commencement of operations) to March 31,
1997 (unaudited).
Statement of Changes in Net Assets - January 9, 1997
(commencement of operations)to March 31, 1997
(unaudited).
Notes to Financial Statements - March 31, 1997
(unaudited).
Financial Highlights - January 9, 1997
(commencement of operations) to March 31,
1997 (unaudited).
All other schedules are either omitted because they
are not required under the related instructions, they
are inapplicable or the required information is
presented in the financial statements or notes which are
included in the Statement of Additional Information of
the Registration Statement.
(b) EXHIBITS:
(1)(a) Articles of Incorporation of the Registrant -
Incorporated herein by reference to Exhibit 1 to
Registration Statement on Form N-1A, filed on
November 20, 1987.
(b) Articles Supplementary to the Articles of
Incorporation of the Registrant - Incorporated
herein by reference to Exhibit 1 to Registration
Statement on Form N-1A, filed on November 20, 1987.
(c) Form of Articles Supplementary to the Articles of
Incorporation of the Registrant - Incorporated by
reference to Exhibit 1(c) to Post-Effective
Amendment No. 5 to Registration Statement on Form
N-1A, filed on May 1, 1991.
(d) Articles Supplementary to the Articles of
Incorporation of the Registrant - Incorporated by
reference to Exhibit 1(d) to Post-Effective
Amendment No. 13 to Registration Statement on Form
N-1A, filed on May 1, 1995.
(e) Articles of Amendment to the Articles of
Incorporation of the Registrant - Incorporated by
reference to Exhibit 1(e) to Post-Effective
Amendment No. 13 to Registration Statement on Form
N-1A, filed on May 1, 1995.
(f) Articles Supplementary to the Articles of
Incorporation adding Technology Portfolio -
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Incorporated by reference to Exhibit 1(f) to Post-
Effective Amendment No. 15 to Registration
Statement on Form N-1A, filed on April 30, 1996.
(g) Articles Supplementary to the Articles of
Incorporation increasing the authorized aggregate
number of shares of capital stock.
(h) Articles Supplementary to the Articles of
Incorporation adding Quasar Portfolio -
Incorporated by reference to Exhibit 1(h) to Post-
Effective Amendment No. 17 to Registration
Statement on Form N-1A, filed July 22, 1996.
(i) Articles Supplementary to the Articles of
Incorporation adding Real Estate Investment
Portfolio - Incorporated by reference to Exhibit
1(i) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A, filed on
February 18, 1997.
(2)(a) By-Laws of the Registrant - Incorporated by
reference to Exhibit 2(a) to Post-Effective
Amendment No. 15 to Registration Statement on Form
N-1A, filed on April 30, 1996.
(b) Revised By-Laws of the Registrant - Incorporated by
reference to Exhibit 2(b) to Post-Effective
Amendment No. 4 of Registration Statement on Form
N-1A, filed on April 30, 1991.
(3) Not applicable.
(4)(a) Specimen form of Share Certificate for Money Market
Portfolio, Growth Portfolio, Growth and Income
Portfolio, Managed Income Portfolio, High Yield
Portfolio, Total Return Portfolio and International
Portfolio - Incorporated by reference to Exhibit 4
to Registration Statement on Form N-1A, filed on
November 20, 1987.
(b) Specimen form of Share Certificate for U.S.
Government/High Grade Securities Portfolio, Short-
Term Multi-Market Portfolio - Incorporated by
reference to Exhibit 4(b) to Post-Effective
Amendment No. 4 of Registration Statement on Form
N-1A, filed on April 30, 1991
(c) Specimen form of Share Certificate for Global Bond
Portfolio - Incorporated by reference to
Exhibit 4(c) to Post-Effective Amendment No. 5 of
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Registration Statement on Form N-1A, filed on
May 1, 1991.
(d) Specimen form of Share Certificate for Technology
Portfolio - Incorporated by reference to Exhibit
4(d) to Post-Effective Amendment No. 15 of
Registration Statement on Form N-1A, filed
April 30, 1996.
(5)(a) Investment Advisory Agreement between the
Registrant and Alliance Capital Management L.P.-
filed herewith.
(b) Sub-Advisory Agreement between Alliance Capital
Management L.P. and Law, Dempsey & Company Limited,
relating to the Global Bond Portfolio -
Incorporated by reference to Exhibit (5)(b) to
Post-Effective Amendment No. 7 of the Registration
Statement on Form N-1A filed on February 26, 1993.
(6) Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. -
Incorporated by reference to Exhibit (6) to Post-
Effective Amendment No. 7 of the Registration
Statement on Form N-1A filed on February 26, 1993.
(7) Not applicable.
(8)(a) Custodian Contract between the Registrant and State
Street Bank and Trust Company - filed herewith.
(b) Amendment to Custodian Agreement - filed herewith.
(9) Not applicable
(10) Not applicable.
(11) Consent of Independent Auditors - filed herewith.
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Not applicable
(16)(a) Schedule for computation of Yield and Total Return
Performance Quotation - Incorporated by reference
to Exhibit 16 to Post-Effective Amendment No. 4 of
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<PAGE>
Registration Statement on Form N-1A, filed on
April 30, 1991.
(b) Schedule for computation of Yield Quotation for the
Money Market Portfolio - Incorporated by reference
to Exhibit 16(b) to Post-Effective Amendment No. 13
of Registration Statement on Form N-1A, filed
May 1, 1995.
OTHER EXHIBIT:
Powers of Attorney of Ms. Block and Messrs. Carifa,
Dievler, Dobkin, Foulk, Hester, Michel and Robinson
- Incorporated by reference to Other Exhibit to
Post- Effective Amendment No. 20 to Registration
Statement on Form N-1A, filed on February 18, 1997.
ITEM 25. Persons Controlled by or under Common Control
with Registrant.
None.
ITEM 26. Number of Holders of Securities.
NUMBER OF RECORD HOLDERS
TITLE OF CLASS March 31, 1997
Common Stock:
Short-Term Multi-Market Portfolio 6
Growth and Income Portfolio 10
Global Bond Portfolio 6
Money Market Portfolio 5
Premier Growth Portfolio 8
U.S. Government/High Grade Portfolio 4
High Yield Portfolio 0
International Portfolio 5
Total Return Portfolio 4
North American Government Income Portfolio 4
Global Dollar Government Portfolio 4
Utility Income Portfolio 4
Conservative Investors Portfolio 8
Growth Investors Portfolio 9
Worldwide Privatization Portfolio 4
Growth Portfolio 9
Technology Portfolio 6
Quasar Portfolio 6
Real Estate Investment Portfolio 3
ITEM 27. Indemnification.
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It is the Registrants policy to indemnify its directors
and officers, employees and other agents to the maximum
extent permitted by Section 2-418 of the General
Corporation Law of the State of Maryland and as set
forth in Article EIGHTH of Registrants Articles of
Incorporation, filed as Exhibit 1, Article VII of the
Registrants By-Laws filed as Exhibit 2 and Section 9 of
the Distribution Services Agreement filed as
Exhibit 6(a), all as set forth below. Registrants
Articles of Incorporation and Article VII, Section 1
through Section 6 of the Registrants By-Laws, as set
forth below. The Advisers liability for any loss
suffered by the Registrant or its shareholders is set
forth in Section 4 of the Advisory Agreement filed as
Exhibit 5(a) in response to Item 24, as set forth below.
Section 2-418 of the Maryland General Corporation Law reads
as follows:
2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS.--(a) In this section the following words
have the meaning indicated.
(1) "Directors" means any person who is or
was a director of a corporation and any person who,
while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessors existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorneys fees.
(4) "Official capacity" means the following:
(i) When used with respect to a
director, the office of director in the
corporation; and
(ii) When used with respect to a person
other than a director as contemplated in subsection
(i), the elective or appointive office in the
corporation held by the officer, or the employment
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or agency relationship undertaken by the employee
or agent in behalf of the corporation.
(iii) "Official capacity" does not
include service for any other foreign or domestic
corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or
is threatened to be made a named defendant or
respondent in a proceeding.
(6) "Proceeding" means any threatened,
pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
established that:
(i) The act or omission of the director
was material to the matter giving rise to the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and
deliberate dishonesty; or
(ii) The director actually received an
improper personal benefit in money, property, or
services; or
(iii) In the case of any criminal
proceeding, the director had reasonable cause to
believe that the act or omission was unlawful.
(2) (i) Indemnification may be against
judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by the
director in connection with the proceeding.
(ii) However, if the proceeding was one
by or in the right of the corporation,
indemnification may not be made in respect of any
proceeding in which the director shall have been
adjudged to be liable to the corporation.
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<PAGE>
(3) (i) The termination of any proceeding by
judgment, order or settlement does not create a
presumption that the director did not meet the
requisite standard of conduct set forth in this
subsection.
(ii) The termination of any proceeding by
conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption
that the director did not meet that standard of
conduct.
(c) A director may not be indemnified
under subsection (b) of this section in respect of
any proceeding charging improper personal benefit
to the director, whether or not involving action in
the directors official capacity, in which the
director was adjudged to be liable on the basis
that personal benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been
successful, on the merits or otherwise, in the
defense of any proceeding referred to in subsection
(b) of this section shall be indemnified against
reasonable expenses incurred by the director in
connection with the proceeding.
(2) A court of appropriate
jurisdiction upon application of a director and
such notice as the court shall require, may order
indemnification in the following circumstances:
(i) If it determines a director is
entitled to reimbursement under paragraph (1) of
this subsection, the court shall order
indemnification, in which case the director shall
be entitled to recover the expenses of securing
such reimbursement; or
(ii) If it determines that the director
is fairly and reasonably entitled to
indemnification in view of all the relevant
circumstances, whether or not the director has met
the standards of conduct set forth in subsection
(b) of this section or has been adjudged liable
under the circumstances described in subsection (c)
of this section, the court may order such
indemnification as the court shall deem proper.
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<PAGE>
However, indemnification with respect to any
proceeding by or in the right of the corporation or
in which liability shall have been adjudged in the
circumstances described in subsection (c) shall be
limited to expenses.
(3) A court of appropriate jurisdiction
may be the same court in which the proceeding
involving the directors liability took place.
(e) (1) Indemnification under subsection
(b) of this section may not be made by the
corporation unless authorized for a specific
proceeding after a determination has been made that
indemnification of the director is permissible in
the circumstances because the director has met the
standard of conduct set forth in subsection (b) of
this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority
vote of a quorum consisting of directors not, at
the time, parties to the proceeding, or, if such a
quorum cannot be obtained, then by a majority vote
of a committee of the board consisting solely of
two or more directors not, at the time, parties to
such proceeding and who were duly designated to act
in the matter by a majority vote of the full board
in which the designated directors who are parties
may participate;
(ii) By special legal counsel selected by the
board or a committee of the board by vote as set
forth in subparagraph (i) of this paragraph, or, if
the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be
established, by a majority vote of the full board
in which directors who are parties may participate;
or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses
shall be made in the same manner as the
determination that indemnification is permissible.
However, if the determination that indemnification
is permissible is made by special legal counsel,
authorization of indemnification and determination
as to reasonableness of expenses shall be made in
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<PAGE>
the manner specified in subparagraph (ii) of
paragraph (2) of this subsection for selection of
such counsel.
(4) Shares held by directors who are parties
to the proceeding may not be voted on the subject
matter under this subsection.
(f) (1) Reasonable expenses incurred by a
director who is a party to a proceeding may be paid
or reimbursed by the corporation in advance of the
final disposition of the proceeding, upon receipt
by the corporation of:
(i) A written affirmation by the
director of the directors good faith belief that
the standard of conduct necessary for
indemnification by the corporation as authorized in
this section has been met; and
(ii) A written undertaking by or on
behalf of the director to repay the amount if it
shall ultimately be determined that the standard of
conduct has not been met.
(2) The undertaking required by
subparagraph (ii) of paragraph (1) of this
subsection shall be an unlimited general obligation
of the director but need not be secured and may be
accepted without reference to financial ability to
make the repayment.
(3) Payments under this subsection shall
be made as provided by the charter, bylaws, or
contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of
expenses provided or authorized by this section may
not be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director
may be entitled under the charter, the bylaws, a
resolution of stockholders or directors, an
agreement or otherwise, both as to action in an
official capacity and as to action in another
capacity while holding such office.
(h) This section does not limit the
corporations power to pay or reimburse expenses
incurred by a director in connection with an
appearance as a witness in a proceeding at a time
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<PAGE>
when the director has not been made a named
defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to
have requested a director to serve an employee
benefit plan where the performance of the directors
duties to the corporation also imposes duties on,
or otherwise involves services by, the director to
the plan or participants or beneficiaries of the
plan:
(2) Excise taxes assessed on a director
with respect to an employee benefit plan pursuant
to applicable law shall be deemed fines; and
(3) Action taken or omitted by the
director with respect to an employee benefit plan
in the performance of the directors duties for a
purpose reasonably believed by the director to be
in the interest of the participants and
beneficiaries of the plan shall be deemed to be for
a purpose which is not opposed to the best
interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall
be indemnified as and to the extent provided in
subsection (d) of this section for a director and
shall be entitled, to the same extent as a
director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and
advance expenses to an officer, employee, or agent
of the corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may
indemnify and advance expenses to an officer,
employee, or agent who is not a director to such
further extent, consistent with law, as may be
provided by its charter, bylaws, general or
specific action of its board of directors or
contract.
(k) (1) A corporation may purchase and
maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of
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the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was
serving at the request, of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan against any
liability asserted against and incurred by such
person in any such capacity or arising out of such
persons position, whether or not the corporation
would have the power to indemnify against liability
under the provisions of this section.
(2) A corporation may provide similar
protection, including a trust fund, letter of
credit, or surety bond, not inconsistent with this
section.
(3) The insurance or similar protection
may be provided by a subsidiary or an affiliate of
the corporation.
(l) Any indemnification of, or advance of
expenses to, a director in accordance with this
section, if arising out of a proceeding by or in
the right of the corporation, shall be reported in
writing to the stockholders with the notice of the
next stockholders' meeting or prior to the
meeting."
Article EIGHTH of the Registrants Articles of Incorporation
reads as follows:
"EIGHTH: To the maximum permitted by the General
Corporation Law of the State of Maryland as from time to
time amended, the Corporation shall indemnify its
currently acting and its former directors and officers
and those persons who, at the request of the
Corporation, serve or have served another Corporation,
partnership, joint venture, trust or other enterprise in
one or more of such Corporations.
The Advisory Agreement between the Registrant and
Alliance Capital Management L.P. provides that Alliance
Capital Management L.P. will not be liable under such
agreements for any mistake of judgment or in any event
whatsoever except for lack of good faith and that
nothing therein shall be deemed to protect, or purport
to protect, Alliance Capital Management L.P. against any
liability to Registrant or its security holders to which
it would otherwise be subject by reason of willful
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<PAGE>
misfeasance, bad faith or gross negligence in the
performance of its duties thereunder, or by reason of
reckless disregard of its obligations or duties
thereunder.
The Distribution Services Agreement between the
Registrant and Alliance Fund Distributors, Inc. provides
that the Registrant will indemnify, defend and hold
Alliance Fund Distributors, Inc., and any person who
controls it within the meaning of Section 15 of the
Investment Company Act of 1940, free and harmless from
and against any and all claims, demands, liabilities and
expenses which Alliance Fund Distributors, Inc. or any
controlling person may incur arising out of or based
upon any alleged untrue statement of a material fact
contained in Registrants Registration Statement or
Prospectus or Statement of Additional Information or
arising out of, or based upon any alleged omission to
state a material fact required to be stated in either
thereof or necessary to make the statements in any
thereof not misleading, provided that nothing therein
shall be so construed as to protect Alliance Fund
Distributors against any liability to Registrant or its
security holders to which it would otherwise be subject
by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or be
reason of reckless disregard of its obligations or
duties thereunder. The foregoing summaries are
qualified by the entire text of Registrants Articles of
Incorporation, the Advisory Agreement between the
Registrant and Alliance Capital Management L.P. and the
Distribution Services Agreement between the Registrant
and Alliance Fund Distributors, Inc.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended (the "Securities
Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has
been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities
being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
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<PAGE>
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such
indemnification by it is against public policy as
expressed in the Securities Act and will be governed by
the final adjudication of such issue.
In accordance with Release No. IC-11330 (September 2,
1980), the Registrant will indemnify its directors,
officers, investment manager and principal underwriters
only if (1) a final decision on the merits was issued by
the court or other body before whom the proceeding was
brought that the person to be indemnified (the
"indemnitee") was not liable by reason or willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office ("disabling conduct") or (2) a reasonable
determination is made, based upon a review of the facts,
that the indemnitee was not liable by reason of
disabling conduct, by (a) the vote of a majority of a
quorum of the directors who are neither "interested
persons" of the Registrant as defined in section
2(a)(19) of the Investment Company Act of 1940 nor
parties to the proceeding ("disinterested, non-party
directors"), or (b) an independent legal counsel in a
written opinion. The Registrant will advance attorneys
fees or other expenses incurred by its directors,
officers, investment adviser or principal underwriters
in defending a proceeding, upon the undertaking by or on
behalf of the indemnitee to repay the advance unless it
is ultimately determined that he is entitled to
indemnification and, as a condition to the advance,
(1) the indemnitee shall provide a security for his
undertaking, (2) the Registrant shall be insured against
losses arising by reason of any lawful advances, or
(3) a majority of a quorum of disinterested, non-party
directors of the Registrant, or an independent legal
counsel in a written opinion, shall determine, based on
a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to
believe that the indemnitee ultimately will be found
entitled to indemnification.
ARTICLE VII, Section 1 through Section 6 of the Registrants
By-laws reads as follows:
"Section 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Corporation shall indemnify its directors to the
fullest extent that indemnification of directors is
permitted by the Maryland General Corporation Law. The
Corporation shall indemnify its officers to the same
extent as its directors and to such further extent as is
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consistent with law. The Corporation shall indemnify
its directors and officers who while serving as
directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or
employee benefit plan to the fullest extent consistent
with law. The indemnification and other rights provided
by this Article shall continue as to a person who has
ceased to be a director or officer and shall inure to
the benefit of the heirs, executors and administrators
of such a person. This Article shall not protect any
such person against any liability to the Corporation or
any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office ("disabling
conduct").
"Section 2. ADVANCES. Any current or former director
or officer of the Corporation seeking indemnification
within the scope of this Article shall be entitled to
advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with
the matter as to which he is seeking indemnification in
the manner and to the fullest extent permissible under
the Maryland General Corporation Law. The person
seeking indemnification shall provide to the Corporation
a written affirmation of his good faith belief that the
standard of conduct necessary for indemnification by the
Corporation has been met and a written undertaking to
repay any such advance if it should ultimately be
determined that the standard of conduct has not been
met. In addition, at least one of the following
additional conditions shall be met: (a) the person
seeking indemnification shall provide a security in form
and amount acceptable to the Corporation for his
undertaking; (b) the Corporation is insured against
losses arising by reason of the advance; or (c) a
majority of a quorum of directors of the Corporation who
are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as
amended, nor parties to the proceeding ("disinterested
non-party directors"), or independent legal counsel, in
a written opinion, shall have determined, based on a
review of facts readily available to the Corporation at
the time the advance is proposed to be made, that there
is reason to believe that the person seeking
indemnification will ultimately be found to be entitled
to indemnification.
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<PAGE>
"Section 3. PROCEDURE. At the request of any person
claiming indemnification under this Article, the Board
of Directors shall determine, or cause to be determined,
in a manner consistent with the Maryland General
Corporation Law, whether the standards required by this
Article have been met. Indemnification shall be made
only following: (a) a final decision on the merits by a
court or other body before whom the proceeding was
brought that the person to be indemnified was not liable
by reason of disabling conduct or (b) in the absence of
such a decision, a reasonable determination, based upon
a review of the facts, that the person to be indemnified
was not liable by reason of disabling conduct by (i) the
vote of a majority of a quorum of disinterested non-
party directors or (ii) an independent legal counsel in
a written opinion.
"Section 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS.
Employees and agents who are not officers or directors
of the Corporation may be indemnified, and reasonable
expenses may be advanced to such employees or agents, as
may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the
Investment Company Act of 1940.
"Section 5. OTHER RIGHTS. The Board of Directors may
make further provision consistent with law for
indemnification and advance of expenses to directors,
officers, employees and agents by resolution, agreement
or otherwise. The indemnification provided by this
Article shall not be deemed exclusive of any other
right, with respect to indemnification or otherwise, to
which those seeking indemnification may be entitled
under any insurance or other agreement or resolution of
stockholders or disinterested directors or otherwise.
The rights provided to any person by this Article shall
be enforceable against the Corporation by such person
who shall be presumed to have relied upon it in serving
or continuing to serve as a director, officer, employee,
or agent as provided above.
"Section 6. AMENDMENTS. References in this Article are
to the Maryland General Corporation Law and to the
Investment Company Act of 1940 as from time to time
amended. No amendment of these By-laws shall effect any
right of any person under this Article based on any
event, omission or proceeding prior to the amendment."
The Registrant participates in a joint directors and
officers liability insurance policy issued by the ICI
Mutual Insurance Company. Coverage under this policy
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<PAGE>
has been extended to directors, trustees and officers of
the investment companies managed by Alliance Capital
Management L.P. Under this policy, outside trustees and
directors are covered up to the limits specified for any
claim against them for acts committed in their
capacities as trustee or director. A pro rata share of
the premium for this coverage is charged to each
investment company and to the Adviser.
ITEM 28. Business and Other Connections of Adviser.
The descriptions of Alliance Capital Management L.P.
under the caption "Management of the Fund" in the
Prospectus and in the Statement of Additional
Information constituting Parts A and B, respectively, of
this Registration Statement are incorporated by
reference herein.
The information as to the directors and executive
officers of Alliance Capital Management Corporation, the
general partner of Alliance Capital Management L.P., set
forth in Alliance Capital Management L.P.s Form ADV
filed with the Securities and Exchange Commission on
April 21, 1988 (File No. 801-32361) and amended through
the date hereof, is incorporated by reference herein.
ITEM 29. Principal Underwriters.
(a) Alliance Fund Distributors, Inc., the Registrants
Principal Underwriter in connection with the sale
of shares of the Registrant, also acts as Principal
Underwriter or Distributor for the following
investment companies:
ACM Institutional Reserves, Inc.
AFD Exchange Reserves
The Alliance Fund, Inc.
Alliance All-Asia Investment Fund, Inc.
Alliance Balanced Shares, Inc.
Alliance Bond Fund, Inc.
Alliance Capital Reserves
Alliance Developing Markets Fund, Inc.
Alliance Global Dollar Government Fund, Inc.
Alliance Global Small Cap Fund, Inc.
Alliance Global Strategic Income Trust, Inc.
Alliance Government Reserves
Alliance Growth and Income Fund, Inc.
Alliance Income Builder Fund, Inc.
Alliance International Fund
Alliance Limited Maturity Government Fund, Inc.
Alliance Money Market Fund
C-17
<PAGE>
Alliance Mortgage Securities Income Fund, Inc.
Alliance Multi-Market Strategy Trust, Inc.
Alliance Municipal Income Fund, Inc.
Alliance Municipal Income Fund, Inc. II
Alliance Municipal Trust
Alliance New Europe Fund, Inc.
Alliance North American Government
Income Trust, Inc.
Alliance Premier Growth Fund, Inc.
Alliance Quasar Fund, Inc.
Alliance Real Estate Investment Fund, Inc.
Alliance/Regent Sector Opportunity Fund, Inc.
Alliance Short-Term Multi-Market Trust, Inc.
Alliance Technology Fund, Inc.
Alliance Utility Income Fund, Inc.
Alliance World Income Trust, Inc.
Alliance Worldwide Privatization Fund, Inc.
Fiduciary Management Associates
The Alliance Portfolios
(b) The following are the Directors and Officers of
Alliance Fund Distributors, Inc., the principal
place of business of which is 1345 Avenue of the
Americas, New York, New York, 10105.
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
Michael J. Laughlin Chairman
Robert L. Errico President
Edmund P. Bergan, Jr. Senior Vice President, Secretary
General Counsel
and Secretary
James S. Comforti Senior Vice President
James L. Cronin Senior Vice President
Daniel J. Dart Senior Vice President
Byron M. Davis Senior Vice President
Richard A. Davies Senior Vice President
Anne S. Drennan Senior Vice President
and Treasurer
Mark J. Dunbar Senior Vice President
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<PAGE>
Bradley F. Hanson Senior Vice President
Geoffrey L. Hyde Senior Vice President
Robert H. Joseph, Jr. Senior Vice President
and Chief Financial Officer
Richard E. Khaleel Senior Vice President
Stephen R. Laut Senior Vice President
Daniel D. McGingley Senior Vice President
Dusty W. Paschall Senior Vice President
Antonios G. Poleondakis Senior Vice President
Robert E. Powers Senior Vice President
Richard K. Sacculo Senior Vice President
Gregory K. Shannahan Senior Vice President
Joseph F. Sumanski Senior Vice President
Peter J. Szabo Senior Vice President
Nicholas K. Willett Senior Vice President
Richard A. Winge Senior Vice President
Jamie A. Atkinson Vice President
Benji A. Baer Vice President
Kenneth F. Barkoff Vice President
Casimir F. Bolanowski Vice President
Beth Cahill Vice President
Timothy W. Call Vice President
Kevin T. Cannon Vice President
William W. Collins, Jr. Vice President
Leo H. Cook Vice President
Richard W. Dabney Vice President
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<PAGE>
John F. Dolan Vice President
Sohaila S. Farsheed Vice President
Leon M. Fern Vice President
William C. Fisher Vice President
Gerard J. Friscia Vice President & Controller
Andrew L. Gangolf Vice President and Assistant Secretary
Assistant General Counsel
Mark D. Gersten Vice President Treasurer and
Chief Financial Officer
Joseph W. Gibson Vice President
William B. Hanigan Vice President
Alan Halfenger Vice President
Daniel M. Hazard Vice President
George R. Hrabovsky Vice President
Valerie J. Hugo Vice President
Scott Hutton Vice President
Thomas K. Intoccia Vice President
Larry P. Johns Vice President
Richard D. Keppler Vice President
Donna M. Lamback Vice President
Thomas Leavitt, III Vice President
James M. Liptrot Vice President
James P. Luisi Vice President
Christopher J. MacDonald Vice President
Michael F. Mahoney Vice President
Lori E. Master Vice President
Shawn P. McClain Vice President
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<PAGE>
Maura A. McGrath Vice President
Matthew P. Mintzer Vice President
Thomas F. Monnerat Vice President
Joanna D. Murray Vice President
Jeanette M. Nardella Vice President
Nicole Nolan-Koester Vice President
John J. O'Connor Vice President
Daniel J. Phillips Vice President
Robert T. Pigozzi Vice President
James J. Posch Vice President
Domenick Pugliese Vice President and Assistant Secretary
Assistant General Counsel
Bruce W. Reitz Vice President
Dennis A. Sanford Vice President
Karen C. Satterberg Vice President
Raymond S. Sclafani Vice President
Robert C. Schultz Vice President
Richard J. Sidell Vice President
Andrew D. Strauss Vice President
Michael J. Tobin Vice President
Joseph T. Tocyloski Vice President
Martha Volcker Vice President
Patrick E. Walsh Vice President
William C. White Vice President
Emilie D. Wrapp Vice President and Assistant Secretary
Special Counsel
Maria L. Carreras Assistant Vice President
C-21
<PAGE>
John W. Cronin Assistant Vice President
Ralph A. DiMeglio Assistant Vice President
Faith C. Dunn Assistant Vice President
John C. Endahl Assistant Vice President
John C. English Assistant Vice President
Duff C. Ferguson Assistant Vice President
John Grambone Assistant Vice President
Brian S. Hanigan Assistant Vice President
James J. Hill Assistant Vice President
Edward W. Kelly Assistant Vice President
Nicholas J. Lapi Assistant Vice President
Patrick Look Assistant Vice President and
Assistant Treasurer
Catherine N. Peterson Assistant Vice President
Carol H. Rappa Assistant Vice President
Clara Sierra Assistant Vice President
Vincent T. Strangio Assistant Vice President
Wesley S. Williams Assistant Vice President
Christopher J. Zingaro Assistant Vice President
Mark R. Manley Assistant Secretary
(c) Not Applicable.
ITEM 30. Location of Accounts and Records.
The accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder are maintained as follows: journals,
ledgers, securities records and other original records are
maintained principally at the offices of Alliance Fund Services,
Inc., 500 Plaza Drive, Secaucus, New Jersey 07094, and at the
offices of State Street Bank and Trust Company, the Registrants
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<PAGE>
Custodian, 225 Franklin Street, Boston, Massachusetts 02110. All
other records so required to be maintained are maintained at the
offices of Alliance Capital Management L.P., 1345 Avenue of the
Americas, New York, New York 10105.
ITEM 31. Management Services.
Not Applicable.
ITEM 32. Undertakings.
(b) Registrant undertakes to file a Post-Effective
Amendment, using financial statements pertaining to the High
Yield Portfolio, which need not be certified, within four to six
months from the effective date of the amendment to its Securities
Act of 1933 Registration Statement.
(c) The Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrants
latest annual report to shareholders upon request and without
charge.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its
Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York
and State of New York, on the 21st day of April, 1997.
ALLIANCE VARIABLE PRODUCTS
SERIES FUND, INC.
by /s/ John D. Carifa
_____________________
John D. Carifa
Chairman and President
Pursuant to the requirements of the Securities Act of
1933, as amended, this Amendment to the Registration Statement
has been signed below by the following persons in the capacities
and on the date indicated:
SIGNATURE TITLE DATE
1. Principal Executive Officer
by /s/ John D. Carifa Chairman and April 21, 1997
_____________________ President
John D. Carifa
2. Principal Financial and
Accounting Officer
by /s/ Mark D. Gersten Treasurer and April 21, 1997
______________________ Chief Financial
Mark D. Gersten Officer
3. All of the Directors
Ruth Block
David H. Dievler
John D. Carifa
John H. Dobkin
William H. Foulk, Jr.
James M. Hester
Clifford L. Michel
Donald J. Robinson
C-24
<PAGE>
by /s/ Edmund P. Bergan, Jr. April 21, 1997
____________________________
(Attorney-in-fact)
Edmund P. Bergan, Jr.
C-25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
(5) (a) Investment Advisory Agreement
(8) (a) Custodian Contract between the Registrant and State
Street Bank and Trust Company.
(8) (b) Amendment to Custodian Agreement
(11) Consent of Independent Auditors
26
00250292.BD0
<PAGE>
Exhibit (5)(a)
INVESTMENT ADVISORY AGREEMENT
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
1345 Avenue of the Americas
New York, New York 10105
July 22, 1992,
as amended as of May 1, 1997
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, N.Y. 10105
Dear Sirs:
We herewith confirm our agreement with you as follows:
1. We are an open-end, diversified management investment
company registered under the Investment Company Act of 1940 (the
"Act"). We are currently authorized to issue separate classes of
shares and our Directors are authorized to reclassify and issue
any unissued shares to any number of additional classes or series
(Portfolios) each having its own investment objective, policies
and restrictions, all as more fully described in the Prospectus
and the Statement of Additional Information constituting parts of
the Registration Statement filed on our behalf under the
Securities Act of 1933 and the Act. We are engaged in the
business of investing and reinvesting our assets in securities of
the type and in accordance with the limitations specified in our
Articles of Incorporation, By-Laws, Registration Statement filed
with the Securities and Exchange Commission under the Securities
Act of 1933 and the Act, and any representations made in our
Prospectus and Statement of Additional Information, all in such
manner and to such extent as may from time to time be authorized
by our Directors. We enclose copies of the documents listed above
and will from time to time furnish you with any amendments
thereof.
2. (a) We hereby employ you to manage the investment and
reinvestment of the assets in each of our Portfolios as above
specified, and, without limiting the generality of the foregoing,
to provide management and other services specified below.
(b) You will make decisions with respect to all
purchases and sales of securities in each of our Portfolios. To
carry out such decisions, you are hereby authorized, as our agent
<PAGE>
and attorney-in-fact, for our account and at our risk and in our
name, to place orders for the investment and reinvestment of our
assets. In all purchases, sales and other transactions in
securities in each of our Portfolios you are authorized to
exercise full discretion and act for us in the same manner and
with the same force and effect as we might or could do with
respect to such purchases, sales or other transactions, as well
as with respect to all other things necessary or incidental to
the furtherance or conduct of such purchases, sales or other
transactions. You are permitted to utilize the services of one
or more Sub-Advisers in connection with the management of the
Global Bond Portfolio, subject to your obtaining our prior
approval of any such Sub-Advisory Agreement.
(c) You will report to our Directors at each meeting
thereof all changes in each Portfolio since the prior report, and
will also keep us in touch with important developments affecting
any Portfolio and on your own initiative will furnish us from
time to time with such information as you may believe appropriate
for this purpose, whether concerning the individual companies
whose securities are included in our Portfolios, the industries
in which they engage, or the conditions prevailing in the economy
generally. You will also furnish us with such statistical and
analytical information with respect to securities in each of our
Portfolios as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of securities, you
will bear in mind the policies set from time to time by our
Directors as well as the limitations imposed by our Articles of
Incorporation and our Registration Statement under the Act and
the Securities Act of 1933, the limitations in the Act and of the
Internal Revenue Code in respect of regulated investment
companies and the investment objective, policies and restrictions
for each of our Portfolios.
(d) It is understood that you will from time to time
employ or associate with yourselves such persons as you believe
to be particularly fitted to assist you in the execution of your
duties hereunder, the cost of performance of such duties to be
borne and paid by you. No obligation may be incurred on our
behalf in any such respect. During the continuance of this
agreement at our request you will provide to us persons
satisfactory to our Directors to serve as our officers. You or
your affiliates will also provide persons, who may be our
officers, to render such clerical, accounting and other services
to us as we may from time to time request of you. Such personnel
may be employees of you or your affiliates. We will pay to you or
your affiliates the cost of such personnel for rendering such
services to us at such rates as shall from time to time be agreed
upon between us, provided that all time devoted to the investment
or reinvestment of securities in each of our Portfolios shall be
for your account. Nothing contained herein shall be construed to
2
<PAGE>
restrict our right to hire our own employees or to contract for
services to be performed by third parties. Furthermore, you or
your affiliates (other than us) shall furnish us without charge
with such management supervision and assistance and such office
facilities as you may believe appropriate or as we may reasonably
request subject to the requirements of any regulatory authority
to which you may be subject. You or your affiliates (other than
us) shall also be responsible for the payment of any expenses
incurred in promoting the sale of our shares (other than the
portion of promotional expenses to be borne by us in accordance
with an effective plan pursuant to Rule 12b-1 under the Act and
costs of printing our prospectuses and other reports to
stockholders and fees related to registration with the Securities
and Exchange Commission and with state regulatory authorities).
3. It is further agreed that you shall be responsible for
the portion of the net expenses of each of our Portfolios (except
interest, taxes, brokerage, fees paid in accordance with an
effective plan pursuant to Rule 12b-1 under the Act, expenditures
which are capitalized in accordance with generally acceptable
accounting principles and extraordinary expenses, all to the
extent permitted by applicable state law and regulation) incurred
by us during each of our fiscal years or portion thereof that
this agreement is in effect between us which, as to a Portfolio,
in any such year exceeds the limits applicable to such Portfolio
under the laws or regulations of any state in which our shares
are qualified for sale (reduced pro rate for any portion of less
than a year). We hereby confirm that, subject to the foregoing,
we shall be responsible and hereby assume the obligation for
payment of all our other expenses, including: (a) payment of the
fee payable to you under paragraph 5 hereof; (b) custody,
transfer and dividend disbursing expenses; (c) fees of directors
who are not your affiliated persons; (d) legal and auditing
expenses; (e) clerical, accounting and other office costs; (f)
the cost of personnel providing services to us, as provided in
subparagraph (d) of paragraph 2 above; (g) costs of printing our
prospectuses and stockholder reports; (h) cost of maintenance of
corporate existence; (i) interest charges, taxes, brokerage fees
and commissions; (j) costs of stationery and supplies; (k)
expenses and fees related to registration and filing with the
Securities and Exchange Commission and with state regulatory
authorities and (1) such promotional expenses as may be
contemplated by an effective plan to Rule 12b-1 under the Act
provided, however, that our payment of such promotional expenses
shall be in the amount, and in accordance with the procedures,
set forth in such plan.
4. We shall expect of you, and you will give us the benefit
of, your best judgment and efforts in rendering these services to
us, and we agree as an inducement to your undertaking these
services that you shall not be liable hereunder for any mistake
3
<PAGE>
of judgment or in any event whatsoever, except for lack of good
faith, provided that nothing herein shall be deemed to protect,
or purport to protect, you against any liability to us or to our
security holders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties hereunder, or by reason of your
reckless disregard of your obligations and duties hereunder.
5. In consideration of the foregoing we will pay you a
monthly fee at an annual rate equal to the Applicable Percentage,
as defined below, of the average daily value of the net assets of
each Portfolio managed by you. Such fee shall be accrued by us
daily and shall be payable in arrears on the last day of each
calendar month for services performed hereunder during such
month. Your reimbursement, if any, of our expenses as provided in
paragraph 3 hereof, shall be estimated and paid to us monthly in
arrears, at the same time as our payment to you for such month.
Payment of the advisory fee will be reduced or postponed, if
necessary, with any adjustments made after the end of the year.
The Applicable Percentage shall be: (i) for our Money Market
Portfolio, .50 of 1% of such Portfolios aggregate net assets;
(ii) for our Premier Growth Portfolio, 1.00% of such Portfolios
aggregate net assets; (iii) for our Growth and Income Portfolio,
.625 of 1% of such Portfolios aggregate net assets; (iv) for our
U.S. Government/High Grade Securities Portfolio, .60 of 1% of
such Portfolios aggregate net assets; (v) for our High-Yield
Portfolio, .75 of 1% of such Portfolios average net assets; (vi)
for our Total Return Portfolio, .625 of 1% of such Portfolios
aggregate net assets; (vii) for our International Portfolio,
1.00% of such Portfolios aggregate net assets; (viii) for our
Short-Term Multi-Market Portfolio, .55 of 1% of such Portfolios
aggregate net assets; (ix) for our Global Bond Portfolio, .65 of
1% of such Portfolios aggregate net assets; (x) for our North
American Government Income Portfolio, .65 of 1% of such
Portfolios aggregate net assets; (xi) for our Utility Income
Portfolio, .75 of 1% of such Portfolios aggregate net assets;
(xii) for our Global Dollar Government Portfolio, .75 of 1% of
such Portfolios aggregate net assets; (xiii) for our Worldwide
Privatization Portfolio, 1.00% of such Portfolios aggregate net
assets; (xiv) for our Growth Portfolio, .75 of 1.00% of such
Portfolios average net assets; (xv) for our Conservative
Investors Portfolio, .75 of 1.00% of such Portfolios average net
assets; (xvi) for our Growth Investors Portfolio, .75 of 1.00% of
such Portfolios average net assets; (xvii) for our Technology
Portfolio, 1.00% of such Portfolios aggregate net assets; (xviii)
for our Quasar Portfolio, 1.00% of such Portfolios aggregate net
assets; (xix) for our Real Estate Investment Portfolio, .90% of
such Portfolios average net assets.
6. This agreement shall become effective on the date hereof
and shall remain in effect with respect to each Portfolio until
4
<PAGE>
December 31, 1997* and thereafter for successive twelve-month
periods (computed from each January 1) with respect to each such
Portfolio provided that such continuance is specifically approved
at least annually by our Directors or by majority vote of the
holders of the outstanding voting securities (as defined in the
Act) of such Portfolio, and, in either case, by a majority of our
Directors who are not parties to this agreement or interested
persons, as defined in the Act, of any such party (other than as
our directors) provided further, however, that if the
continuation of this agreement is not approved as to a Portfolio,
you may continue to render to such Portfolio the services
described herein in the manner and to the extent permitted by the
Act and the rules and regulations thereunder. Upon the
effectiveness of this agreement, it shall supersede all previous
agreements between us covering the subject matter hereof. This
agreement may be terminated with respect to any Portfolio at any
time, without the payment of any penalty, by vote of a majority
of the outstanding voting securities (as so defined) of such
Portfolio, or by a vote of a majority of our Directors on sixty
days' written notice to you, or by you with respect to any
Portfolio on sixty days' written notice to us.
7. This agreement may not be transferred, assigned, sold or
in any manner hypothecated or pledged by you and this agreement
shall terminate automatically in the event of such transfer,
assignment, sale, hypothecation or pledge by you. The terms
"transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and any
interpretation thereof contained in rules or regulations
promulgated by the Securities and Exchange Commission thereunder.
8. (a) Except to the extent necessary to perform your
obligations hereunder, nothing herein shall be deemed to limit or
restrict your right, or the right of any of your employees, or
any of the Directors of Alliance Capital Management Corporation,
your general partner, who may also be a Director of ours, or
persons otherwise affiliated with us (within the meaning of the
Act), to engage in any other business or to devote time and
attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render
services of any kind to any other corporation, trust, firm,
individual or association.
(b) You will notify us of any change in the general
partners of your partnership within a reasonable time after such
change.
____________________
* December 31, 1998 with respect to Real Estate Investment
Portfolio.
5
<PAGE>
9. If you cease to act as our investment adviser, or in any
event, if you so request in writing, we agree to take all
necessary action to change the name of our corporation to a name
not including the word "Alliance". You may from time to time make
available without charge to us for our use such marks or symbols
owned by you, including marks or symbols containing the name
"Alliance" or any variation thereof, as you may consider
appropriate. Any such marks or symbols so make available will
remain your property and will have the right, upon notice in
writing, to require us to cease the use of such mark or symbol at
any time.
If the foregoing is in accordance with your understanding,
will you kindly so indicate by signing and returning to us the
enclosed copy hereof.
Very truly yours,
Alliance Variable Products
Series Fund,Inc.
By /s/ John D. Carifa
__________________________
John D. Carifa
Chairman and President
Accepted:
July 22, 1992, as
amended as of May 1, 1997
Alliance Capital Management L.P.
By Alliance Capital Management Corporation,
its General Partner
By: /s/ John D. Carifa
____________________________
John D. Carifa
President and Chief Operating Officer
6
00250292.BD1
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Exhibit (8)(a)
CUSTODIAN CONTRACT
Between
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
1. Employment of Custodian and Property to be Held By
It .............................................2
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United
States ............................................. 3
2.1 Holding Securities........................... 3
2.2 Delivery of Securities....................... 3
2.3 Registration of Securities................... 9
2.4 Bank Accounts................................ 9
2.5 Availability of Federal Funds................10
2.6 Collection of Income.........................11
2.7 Payment of Fund Monies.......................12
2.8 Liability for Payment in Advance of Receipt
of Securities Purchased......................15
2.9 Appointment of Agents........................15
2.10 Deposit of Fund Assets in Securities System..15
2.10A Fund Assets Held in the Custodian's Direct
Paper System.................................18
2.11 Segregated Account ..........................20
2.12 Ownership Certificates for Tax Purposes......22
2.13 Proxies......................................22
2.14 Communications Relating to Portfolio
Securities...................................22
3. Duties of the Custodian with Respect to Property
of the Fund Held Outside of the United States.......23
3.1 Appointment of Foreign Sub-Custodians........23
3.2 Assets to be Held............................24
3.3 Foreign Securities Depositories..............24
3.4 Segregation of Securities....................24
3.5 Agreements with Foreign Banking Institutions.25
3.6 Access of Independent Accountants of
the Fund.....................................26
3.7 Reports by Custodian.........................26
3.8 Transactions in Foreign Custody Account......26
3.9 Liability of Foreign Sub-Custodians..........27
3.10 Liability of Custodian.......................28
3.11 Reimbursement for Advances...................29
3.12 Monitoring Responsibilities..................30
3.13 Branches of U.S. Banks.......................31
3.14 Tax Law......................................31
4. Payments for Sales or Repurchase or Redemptions of
Shares of the Fund..................................32
5. Proper Instructions.................................33
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6. Actions Permitted Without Express Authority.........33
7. Evidence of Authority...............................34
8. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value and Net
Income .............................................35
9. Records ............................................35
10. Opinion of Fund's Independent Accountants...........36
11 Reports to Fund by Independent Public Accountants...36
12. Compensation of Custodian...........................37
13. Responsibility of Custodian.........................37
14. Effective Period, Termination and Amendment.........39
15. Successor Custodian.................................41
16. Interpretive and Additional Provisions..............43
17. Additional Funds....................................41
18. Massachusetts Law to Apply..........................43
19. Prior Contracts.....................................44
20. Shareholder Communications..........................44
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CUSTODIAN CONTRACT
This Contract between Alliance Variable Products
Series Fund, Inc., a corporation organized and existing
under the laws of Maryland, having its principal place of
business at 1345 Avenue of the Americas, New York, New York
hereinafter called the "Fund", and State Street Bank and
Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in
separate series, with each such series representing
interests in a separate portfolio of securities and other
assets; and
WHEREAS, the Fund intends to initially offer shares
in nine series, the Money Market Portfolio, the Growth
Portfolio, the Growth and Income Portfolio, the U.S.
Government/High Grade Securities Portfolio, the High-Yield
Portfolio, the Total Return Portfolio, the International
Portfolio, the Short-Term Multi-Market Portfolio, and the
Global Bond Portfolio (such series together with all other
series subsequently established by the Fund and made subject
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to this Contract in accordance with paragraph 17, being
herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual
covenants and agreements hereinafter contained, the parties
hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the
custodian of the assets of the Portfolios of the Fund,
including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the
United States ("domestic securities") and securities it
desires to be held outside the United States ("foreign
securities") pursuant to the provisions of the Articles of
Incorporation. The Fund on behalf of the Portfolio(s) agrees
to deliver to the Custodian all securities and cash of the
Portfolios, and all payments of income, payments of
principal or capital distributions received by it with
respect to all securities owned by the Portfolio(s) from
time to time, and the cash consideration received by it for
such new or treasury shares of capital stock of the Fund
representing interests in the Portfolios, ("Shares") as may
be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or
received by the Portfolio and not delivered to the
Custodian.
2
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Upon receipt of "Proper Instructions" (within the
meaning of Article 5), the Custodian shall on behalf of the
applicable Portfolio(s) from time to time employ one or more
sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Directors
of the Fund on behalf of the applicable Portfolio(s). The
Custodian shall be liable to the Fund for losses of
securities or other property held on behalf of the Fund
which result from negligent or willful misconduct of any
sub-custodian so employed or any of its respective officers,
employees, agents or nominees. The Custodian may employ as
sub-custodian for the Fund's foreign Securities on behalf of
the applicable Portfolio(s) the foreign banking institutions
and foreign securities depositories designated in Schedule A
hereto but only in accordance with the provisions of
Article 3.
2. Duties of the Custodian with Respect to Property of the
Fund Meld By the Custodian in the United States
2.1 Holding Securities. The Custodian shall bold and
physically segregate for the account of each Portfolio
all non-cash property, to be held by it in the United
States including all domestic securities owned by such
Portfolio, other than (a) securities which are
maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a
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book-entry system authorized by the U.S. Department of
the Treasury, collectively referred to herein as
"Securities System" and (b) commercial paper of an
issuer for Rich State Street Bank and Trust Company
acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release
and deliver domestic securities owned by a Portfolio
held by the Custodian or in a Securities System
account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System
Account") only upon receipt of Proper Instructions
from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed
appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account
of the Portfolio and receipt of payment
therefor;
2) Upon the receipt of payment in connection
with any repurchase agreement related to
such securities entered into by the
Portfolio;
4
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3) In the case of a sale effected through a
Securities System, in accordance with the
provisions of Section 2.10 hereof;
4) To the depository agent in connection with
tender or other similar offers for
securities Of the Portfolio;
5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or
otherwise become payable; provided that, in
any such case, the caste or other
consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for
transfer into the name of the Portfolio or
into the name of any nominee or nominees of
the Custodian or into the name or nominee
name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name
of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different
number of bonds, certificates or other
evidence representing the same aggregate
face amount or number of units; provided
that, in any such case, the new securities
are to be delivered to the Custodian;
5
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7) Upon the sale of such securities for the
account of the Portfolio, to the broker or
its clearing agent, against a receipt, for
examination in accordance with "street
delivery" custom; provided that in any such
case, the Custodian shall have no
responsibility or liability for any loss
arising from the delivery of such securities
prior to receiving payment for such
securities except as may arise from the
Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any
plan of merger, consolidation,
recapitalization, reorganization or
readjustment of the securities of the issuer
of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit
agreement; provided that, in any such case,
the new securities and cash, if any, are to
be delivered to the Custodian;
9) In the case of warrants, rights or similar
securities, the surrender thereof in the
exercise of such warrants, rights or similar
6
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securities or the surrender of interim
receipts or temporary securities for
definitive securities; provided that, in any
such case, the new securities and cash, if
any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of
securities made by the Portfolio, but only
against receipt of adequate collateral as
agreed upon from time to time by the
Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash
or obligations issued by the United States
government, its agencies or instrumen-
talities, except that in connection with any
loans for which collateral is to be credited
to the Custodian's account in the book-entry
system authorized by the U.S. Department of
the Treasury, the Custodian will not be held
liable or responsible for the delivery of
securities owned by the Portfolio prior to
the receipt of such collateral;
11) For delivery as security in connection with
any borrowings by the Fund on behalf of the
Portfolio requiring a pledge of assets by
7
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the Fund on behalf of the Portfolio, but
only against receipt of amounts borrowed;
12) For delivery in accordance with the
provisions of any agreement among the Fund
on behalf of the Portfolio, the Custodian
and a broker-dealer registered under the
Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National
Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the
rules of The Options Clearing Corporation
and of any registered national securities
exchange, or of any similar organization or
organizations, regarding escrow or other
arrangements in connection with transactions
by the Portfolio of the Fund;
13) For delivery in accordance with the
provisions of any agreement among the Fund
on behalf of the Portfolio, the Custodian,
and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating
to compliance with the rules of the
Commodity Futures Trading Commission and/or
any Contract Market, or any similar
organization or organizations, regarding
8
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account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the
transfer agent ("Transfer Agent") for the
Fund, for delivery to such Transfer Agent or
to the borders of shares in connection with
distributions in kind, as may be described
from time to time in the currently effective
prospectus and statement of additional
information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of
requests by borders of Shares for repurchase
or redemption; and
15) For any other proper corporate purpose, but
only upon receipt of, in addition to Proper
Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a
resolution of the Board of Directors or of
the Executive Committee signed by an officer
of the Fund and certified by the Secretary
or an Assistant Secretary, specifying the
securities of the Portfolio to be delivered,
setting forth the purpose for Rich such
delivery is to be made, declaring such
purpose to be a proper corporate purpose,
9
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and naming the person or persons to Boom
delivery of curb securities shall be made.
2.3 Registration of Securities. Domestic securities held
by the Custodian (other than bearer securities) shall
be registered in the name of the Portfolio or in the
name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which
nominee shall be assigned exclusively to the
Portfolio, unless the Fund teas authorized in writing
the appointment of a nominee to be used in common with
other registered investment companies baying the same
investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-
custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the
Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall
utilize Its best efforts only to timely collect income
due the Fund on such securities and to notify the Fund
on a best efforts basis only of relevant corporate
actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
10
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2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States
in the name of each Portfolio of the Fund, subject
only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold
in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained
by the Portfolio in a bank account established and
used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to
its credit as Custodian in the Banking Department of
the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary
or desirable; provided, however, that every such bank
or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and
that each such bank or trust company and the funds to
be deposited with each such bank or trust company
shall on behalf of each applicable Portfolio be
approved by vote of a majority of the Board of
Directors of the Fund. Such funds shall be deposited
by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that
11
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capacity. Any bank account maintained pursuant to this
Section 2.4 shall be subject to the terms and
conditions of this Agreement.
2.5 Availability of Federal Funds. Upon mutual agreement
between the Fund on behalf of each applicable
Portfolio and the Custodian, the Custodian shall, upon
the receipt of Proper Instructions from the Fund on
behalf of a Portfolio, make federal funds available to
such Portfolio as of specified times agreed upon from
time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of
such Portfolio which are deposited into the
Portfolio's account.
2.6 Collection of Income. Subject to the provisions of
Section 2.3, The Custodian shall collect on a timely
basis all income and other payments with respect to
registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or
pursuant to custom in the securities business, and
shall collect on a timely basis all income and other
payments with respect to bearer domestic securities
if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to
such Portfolio's custodian account. Without limiting
12
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the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other
income items requiring presentation as and when they
become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio
on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the
Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to
provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to
which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall
pay out monies of a Portfolio in the following cases
only:
1) Upon the purchase of domestic securities,
options, futures contracts or options on
futures contracts for the account of the
Portfolio but only (a) against the delivery
of such securities or evidence of title to
such options, futures contracts or options
13
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on futures contracts to the Custodian (or
any bank, banking firm or trust company
doing business in the United States or
abroad which is qualified under the
Investment Company Act of 1940, as amended,
to act as a custodian and has been
designated by the Custodian as its agent for
this purpose) registered in the name of the
Portfolio or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the
case of a purchase effected through a
Securities System, in accordance with the
conditions set forth in Section 2.10 hereof;
(c) in the case of a purchase involving the
Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d)
in the case of repurchase agreements entered
into between the Fund on behalf of the
Portfolio and the Custodian, or another
bank, or a broker-dealer which is a member
of NASD, (i) against delivery of the
securities either in certificate form or
through an entry crediting the Custodian's
account at the Federal Reserve Bank with
14
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such securities or (ii) against delivery of
the receipt evidencing purchase by the
Portfolio of securities owned by the
Custodian along with written evidence of the
agreement by the Custodian to repurchase
such securities from the Portfolio or (e)
for transfer to a time deposit account of
the Fund in any bank, whether domestic or
foreign; such transfer may be effected prior
to receipt of a confirmation from a broker
and/or the applicable bank pursuant to
proper instructions from the Fund as defined
in article 5;
2) In connection with conversion, exchange or
surrender of securities owned by the
Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of shares
issued by the Portfolio as set forth in
Article 4 hereof;
4) For the payment of any expense or liability
incurred by the Portfolio, including but not
limited to the following payments for the
account of the Portfolio: interest, taxes,
management, accounting, transfer agent and
15
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legal fees, and operating expenses of the
Fund whether or not such expenses are to be
in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares
of the Portfolio declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends
received in respect of securities sold
short;
7) For any other proper purpose, but only upon
receipt of, in addition to Proper
Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution
of the Board of Directors or of the
Executive Committee of the Fund signed by an
officer of the Fund and certified by its
Secretary or an Assistant Secretary,
specifying the amount of such payment,
setting forth the purpose for which such
payment is to be made, declaring such
purpose to be a proper purpose, and naming
the person or persons to whom such payment
is to be made.
16
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2.8 Liability for Payment in Advance of Receipt of
Securities Purchased. Except as specifically stated
otherwise in this Contract, in any and every case
where payment for purchase of domestic securities for
the account of a Portfolio is made by the Custodian in
advance of receipt of the securities purchased in the
absence of specific written instructions from the Fund
on behalf of such Portfolio to so pay in advance, the
Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time
or times in its discretion appoint (and may at any
time remove) any other bank or trust company which is
itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent
to carry out such of the provisions of this Article 2
as the Custodian may from time to time direct;
provided, however, that the appointment of any agent
shall not relieve the Custodian of its responsibili-
ties or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain securities owned
by a Portfolio in a clearing agency registered with
the Securities and Exchange Commission under Section
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17A of the Securities Exchange Act of 1934, which acts
as securities depository, or in the book-entry system
authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to
herein as "Securities System" in accordance with
applicable Federal Reserve Board and Securities and
Exchange Commission sales and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the
Portfolio in a Securities System provided
that such securities are represented in an
account ("Account") of the Custodian in the
Securities System which shall not include
any assets of the Custodian other than
assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to
securities of the Portfolio which are
maintained in a Securities System shall
identify by book-entry those securities
belonging to the Portfolio;
3) The Custodian shall pay for securities
purchased for the account of the Portfolio
upon (i) receipt of advice from the
Securities System that such securities have
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been transferred to the Account, and (ii)
the making of an entry on the records of the
Custodian to reflect such payment and
transfer for the account of the Portfolio.
The Custodian shall transfer securities sold
for the account of the Portfolio upon (i)
receipt of advice from the Securities System
that payment for such securities has been
transferred to the Account, and (ii) the
making of an entry on the records of the
Custodian to reflect such transfer and
payment for the account of the Portfolio.
Copies of all advices from the Securities
System of transfers of securities for the
account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio
by the Custodian and be provided to the Fund
at its request. Upon request, the Custodian
shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to
or from the account of the Portfolio in the
form of a written advice or notice and shall
furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets
reflecting each day's transactions in the
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Securities System for the account of the
Portfolio.
4) The Custodian shall provide the Fund for the
Portfolio with any report obtained by the
Custodian on the Securities System's
accounting system, internal accounting
control and procedures for safeguarding
securities deposited in the Securities
System;
5) The Custodian Shall have received from the
Fund on behalf of the Portfolio the initial
or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be
liable to the Fund for the benefit of the
Portfolio for any loss or damage to the
Portfolio resulting from use of the
Securities System by reason of any
negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of
its or their employees or from failure of
the Custodian or any such agent to enforce
effectively such rights as it may have
against the Securities System; at the
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election of the Fund, it shall be entitled
to be Subrogated to the rights of the
Custodian with respect to any claim against
the Securities System or any other person
which the Custodian may have as a
consequence of any such loss or damage if
and to the extent that the Portfolio has not
been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper
System. The Custodian may deposit and/or maintain
securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the
Direct Paper System will be effected in the
absence of Proper Instructions from the Fund
on behalf of the Portfolio;
2) The Custodian may keep securities of the
Portfolio in the Direct Paper System only if
such securities are represented in an
account ("Account") of the Custodian in the
Direct Paper System which shall not include
any assets of the Custodian other than
assets held as a fiduciary, custodian or
otherwise for customers;
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3) The records of the Custodian with respect to
securities of the Portfolio which are
maintained in the Direct Paper System shall
identify by book-entry those securities
belonging to the Portfolio;
4) The Custodian shall pay for securities
purchased for the account of the Portfolio
upon the making of an entry on the records
of the Custodian to reflect such payment and
transfer of securities to the account of the
Portfolio. The Custodian shall transfer
securities sold for the account of the
Portfolio upon the making of an entry on the
records of the Custodian to reflect such
transfer and receipt of payment for the
account of the Portfolio;
5) The Custodian shall furnish the Fund on
behalf of the Portfolio confirmation of each
transfer to or from the account of the
Portfolio, in the form of a written advice
or notice, of Direct Paper on the next
business day following such transfer and
shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets
reflecting each day's transaction in the
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Securities System for the account of the
Portfolio;
6) The Custodian shall provide the Fund on
behalf of the Portfolio with any report on
its system of internal accounting control as
the Fund may reasonably request from time to
time.
2.11 Segregated Account. The Custodian shall upon receipt
of Proper Instructions from the Fund on behalf of each
applicable Portfolio establish and maintain a
segregated account or accounts for and on behalf of
each such Portfolio, into which account or accounts
may be transferred cash and/or securities, including
securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-
dealer registered under the Exchange Act and a member
of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating
to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission
or any registered contract market), or of any similar
organization or organizations, regarding escrow or
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other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash
or government securities in connection with options
purchased, sold or written by the Portfolio or
commodity futures contracts or options thereon
purchased or sold by the Portfolio, (iii) for the
purposes of compliance by the Portfolio with the
procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered
investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause
(iv), upon receipt of, in addition to Proper
Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the
Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and
declaring such purposes to be proper corporate
purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian
shall execute ownership and other certificates and
affidavits for all federal and state tax purposes in
24
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connection with receipt of income or other payments
with respect to domestic securities of each Portfolio
held by it and in connection with transfers of
securities.
2.13 Proxies. The Custodian shall, with respect to the
domestic securities held hereunder, cause to be
promptly executed by the registered holder of such
securities, if the securities are registered otherwise
than in the name of the Portfolio or a nominee of the
Portfolio, all proxies, without indication of the
manner in which such proxies are to be voted, and
shall promptly deliver to the Portfolio such proxies,
all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Portfolio Securities.
Subject to the provisions of Section 2.3, the
Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without
limitation, pendency of calls and maturities of
domestic securities and expirations of rights in
connection therewith and notices of exercise of call
and put options written by the Fund on behalf of the
Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the
Custodian from issuers of the securities being held
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<PAGE>
for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the
Custodian from issuers of the securities whose tender
or exchange is sought and from the party (or his
agents) making the Lender or exchange offer. If the
Portfolio desires to take action with respect to any
tender offer, exchange offer or any other similar
transaction, the Portfolio shall notify the Custodian
at least three business days prior to the date on
which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the
Fund Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian
to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the
United States the foreign banking institutions and
foreign securities depositories designated on
Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified
resolution of the Fund's Board of Directors, the
Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional
26
<PAGE>
foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the Fund may instruct the
Custodian to cease the employment of any one or more
such sub-custodians for maintaining custody of the
Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the
securities and other assets maintained in the custody
of the foreign sue-custodians to: (a) "foreign
securities", as defined in paragraph (c)(l) of Rule
17f-5 under the Investment Company Act of 1940, and
(b) cash sad cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities
transactions.
3.3 Foreign Securities Depositories. Except as may
otherwise be agreed upon in writing by the Custodian
and the Fund, assets of the Portfolios shall be
maintained in foreign securities depositories only
through arrangements implemented by the foreign
banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5
hereof. Any securities and other assets maintained in
27
<PAGE>
the custody of foreign banking institutions or foreign
securities depositories pursuant to Sections 3.2 or
3.3 shall be subject to the terms of this Agreement.
3.4 Segregation of Securities. The Custodian shall
identify on its books as belonging to each applicable
Portfolio of the Fund, the foreign securities of such
Portfolios held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such
institution establish a custody account for the
Custodian on behalf of the Fund for each applicable
Portfolio of the Fund and physically segregate in each
account, securities and other assets of the
Portfolios, and, in the event that such institution
deposits the securities of one or more of the
Portfolios in a foreign securities depository, that it
shall identify on its books as belonging to the
Custodian, as agent for each applicable Portfolio, the
securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each
agreement with a foreign banking institution shall be
substantially in the form set forth in Exhibit 1
hereto and shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge,
security interest, lien or claim of any kind in favor
28
<PAGE>
of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership
for the assets of each Portfolio will be freely
transferable without the payment of money or value
other than for custody or administration; (c) adequate
records will be maintained identifying the assets as
belonging to each applicable Portfolio; (d) officers
of or auditors employed by, or other representatives
of the Custodian, including to the extent permitted
under applicable law the independent public
accountants for the Fund, will be given access to the
books and records of the foreign banking institution
relating to its actions under its agreement with the
Custodian; and (e) assets of the Portfolios held by
the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon
request of the Fund, the Custodian will use its best
efforts to arrange for the independent accountants of
the Fund to be afforded access to the books and
records of any foreign banking institution employed as
a foreign sub-custodian insofar as such books and
records relate to the performance of such foreign
29
<PAGE>
banking institution under its agreement with the
Custodian.
3.7 Reports by Custodian. The Custodian will supply to the
Fund from time to time, as mutually agreed upon,
statements in respect of the securities and other
assets of the Portfolio(s) held by foreign sub-
custodians, including but not limited to an
identification of entities having possession of the
Portfolio(s) securities and other assets and advises
or notifications of any transfers of securities to or
from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of
each applicable Portfolio indicating, as to securities
acquired for a Portfolio, the identity of the entity
baying physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of
this Section 3.8, the provision of Sections 2.2 and
2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the
United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to
the contrary, settlement and payment for securities
received for the account of each applicable Portfolio
and delivery of securities maintained for the account
30
<PAGE>
of each applicable Portfolio may be effected in
accordance with the customary established securities
trading or securities processing practices and
procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of
receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such
entity's nominee to the same extent as set forth in
Section 2.3 of this Contract.
3.9 Liability of Foreign Sub-Custodians. Each agreement
pursuant to which the Custodian employs a foreign
banking institution as a foreign sub-custodian shall
require the institution to exercise reasonable care in
the performance of its duties and to indemnify, and
hold harmless, the Custodian and each Fund from and
against any loss, damage, cost, expense, liability or
claim arising out of or in connection with the
institutions performance of such obligations. At the
election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect
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<PAGE>
to any claims against a foreign banking institution as
a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund
has not been made whole for any such loss, damage,
cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable
for the acts or omissions of a foreign banking
institution to the same extent as set forth with
respect to sub-custodians generally in this Contract
and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S.
bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-
custodian has otherwise exercised reasonable care.
Nothing contained in any contract between the
Custodian and any sub-custodian, foreign banking
institution, foreign securities depository, branch of
a U.S. bank or other agent shall diminish or otherwise
alter the liability of the Custodian to the Fund.
Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State
32
<PAGE>
Street London Ltd., the Custodian shall not be
relieved of any responsibility to the Fund for any
loss due to such delegation, except such 1055 as may
result from (a) political risk (including, but not
limited to, exchange control restrictions,
confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency
of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other
losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable
care.
3.11 Reimbursement for Advances. If the Fund requires the
Custodian to advance cash or securities for any
purpose for the benefit of a Portfolio including the
purchase or sale of foreign exchange or of contracts
for foreign exchange, or in the event that the
Custodian or its nominee shall incur or be assessed
any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this
Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time
held for the account of the applicable Portfolio shall
33
<PAGE>
be security therefor and should the Fund fail to repay
the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of
such Portfolios assets to the extent necessary to
obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall
furnish annually to the Fund, during the month of
June, information concerning the foreign sub-
custodians employed by the Custodian. Such information
shall be similar in kind and scope to that furnished
to the Fund in connection with the initial approval Of
this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case
of any foreign sub-custodian not the subject of an
exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian
that there appears to be a substantial likelihood that
its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200
million (in each case computed in accordance with
generally accepted U.S. accounting principles).
34
<PAGE>
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract,
the provisions hereof shall not apply where the
custody of the Portfolios assets are maintained in a
foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment
Company Act of 1940 meeting the qualification set
forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian Shall be governed
by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the
United Kingdom shall be maintained in an interest
bearing account established for the Fund with the
Custodian's London branch, which account shall be
subject to the direction of the Custodian, State
Street London Ltd. or both.
3.14 Tax Law
The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed
on the Fund or the Custodian as custodian of the Fund
by the tax law of the United States of America or any
state or political subdivision thereof. It shall be
the responsibility of the Fund to notify the Custodian
of the obligations imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of
35
<PAGE>
jurisdictions other than those mentioned in the above
sentence, including responsibility for withholding and
other taxes, assessments or other governmental
charges, certifications and governmental reporting.
The sole responsibility of the Custodian with regard
to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for
exemption or refund under the tax law of jurisdictions
for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of
Shares of the Fund
The Custodian shall receive from the distributor for
the Shares or from the Transfer Agent of the Fund and
deposit into the account of the appropriate Portfolio such
payments as are received for Shares of that Portfolio issued
or sold from time to time by the Fund. The Custodian will
provide timely notification to the Fund on behalf of each
such Portfolio and the Transfer Agent of any receipt by it
of payments for Shares of such Portfolio.
From such funds as may be available for the purpose
but subject to the limitations of the Articles of
Incorporation and any applicable votes of the Board of
Directors of the Fund pursuant thereto, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make
funds available for payment to holders of Shares who have
36
<PAGE>
delivered to the Transfer Agent a request for redemption or
repurchase of their Shares. In connection with the
redemption or repurchase of Shares of a Portfolio, the
Custodian is authorized upon receipt of instructions from
the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection
with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the
Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Fund
and the Custodian.
5. Proper Instructional
Proper Instructions as used throughout this Contract
means a writing signed or initialled by one or more person
or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved,
including a specific statement of the purpose for which such
action is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The
Fund shall cause all oral instructions to be confirmed in
37
<PAGE>
writing. Upon receipt of a certificate of the Secretary or
an Assistant Secretary as to the authorization by the Board
of Directors of the Fund accompanied by a detailed
description of procedures approved by the Board of
Directors, Proper Instructions may include communications
effected directly between electro-mechanical or electronic
devices provided that the Board of Directors and the
Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this
Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three party
agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express
authority from the Fund on behalf of each applicable
Portfolio:
1) make payments to itself or others for minor
expenses of handling securities or other similar items
relating to its duties under this Contract, provided that
all such payments Shall be accounted for to the Fund on
behalf of the Portfolio;
2) surrender securities in temporary form for
securities in definitive form;
38
<PAGE>
3) endorse for collection, in the name of the
Portfolio, checks, drafts and other negotiable instruments;
and
4) in general, attend to all non-discretionary
details in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities
and property of the Portfolio except as otherwise directed
by the Board of Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have
been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote
of the Board of Directors of the Fund as conclusive evidence
(a) of the authority of any person to act in accordance with
such vote or (b) of any determination or of any action by
the Board of Directors pursuant to the Articles of
Incorporation as described in such vote, and such vote may
be considered as in full force and effect until receipt by
the Custodian of written notice to the contrary.
8. Duties of Custodial with Respect to the Books of Account
39
<PAGE>
and Calculation of Net Assent Value and Net Income
The Custodian shall cooperate with and supply
necessary information to the entity or entities appointed by
the Board of Directors of the Fund to keep the books of
account of each Portfolio and/or compute the net asset value
per share of the outstanding shares of each Portfolio or, if
directed in writing to do so by the Fund on behalf of the
Portfolio, shall itself keep such books of account and/or
compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the
Portfolio as described in the Fund's currently effective
prospectus related to such Portfolio and shall advise the
Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer
of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its
various components. The calculations of the net asset value
per share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the
Fund's currently effective prospectus related to such
Portfolio.
9. Records
The Custodian shall with respect to each Portfolio
create and maintain all records relating to its activities
and obligations under this Contract in such manner as will
40
<PAGE>
meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31
thereof and Rules 31a-1 and 31a-2 thereunder. All such
records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees
or agents of the Fund and employees and agents of tab
Securities and Exchange Commission. The Custodian shall, at
the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian
and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and
the Custodian, include certificate numbers in such
tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the
Fund on behalf of each applicable Portfolio may from time to
time request, to obtain from year to year favorable opinions
from the Fund's independent accountants with respect to its
activities hereunder in connection with the preparation of
the Fund's Form N-1A, and Form N-SAR or other annual reports
to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.
41
<PAGE>
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of
each of the Portfolios at such times as the Fund may
reasonably require, with reports by independent public
accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian
under this Contract; such reports, shall be of sufficient
scope and in deficient detail, an may reasonably be required
by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable
compensation for its services and expenses as Custodian, as
agreed upon from time to time between the Fund on behalf of
each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
The Custodian shall exercise the standard of care that
a professional custodian engaged in the banking or trust
company industry and having professional expertise in
financial and securities processing transactions and custody
42
<PAGE>
would observe in providing the aforesaid services. So long
as and to the extent that it is in the exercise of the
above-stated standard of care, the Custodian shall not be
responsible for the title, validity or genuineness of any
property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to
the terms of a three-party futures or options agreement. The
custodian shall be held to the exercise of the above-stated
standard of care in carrying out the provisions of this
Contract, but shall be kept, indemnified by and shall be
without liability to the Fund for any action taken or
omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who
may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted
pursuant to such advice. To the extent stated above, the
Custodian shall be responsible for loss or damage to
property under its care, custody, possession or control, or
under the care, custody, possession or control of a sub-
custodian, foreign banking institution, foreign securities
43
<PAGE>
depository, U.S. banking institution or other agents
utilized in connection with this Agreement.
The Custodian shall be liable for the acts or
omissions of a foreign banking institution, foreign
securities depository, branch of a U.S. bank or other agent
appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to
sub-custodians located in the United States (except as
specifically provided in Article 3.10) and, regardless of
whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13
hereof, the Custodian shall not be liable for any loss,
damage, cost, expense, liability or claim resulting from, or
caused by, the direction of or authorization by the Fund to
maintain custody of any securities or cash of the Fund in a
foreign country including, but not limited to, losses
resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the fund on behalf of a Portfolio requires the
Custodian to take any action with respect to securities,
which action involves the payment of money or which action
may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the
Portfolio being liable for the payment of money or incurring
44
<PAGE>
liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian
in an amount and form satisfactory to it.
Except as otherwise agreed to in writing, any
securities or other property of the Fund at any time in the
possession of the Custodian or any sub-custodian or agent of
the Custodian may at all times be held and treated as
collateral for the payment of securities for which payment
has not been made, or for the purchase or sale of foreign
exchange or of contracts for foreign exchange,
notwithstanding the provisions of Section 15. The Custodian
shall have a continuing lien on such securities and other
property of the Fund only to the extent that the Custodian,
any sub-custodian or agent of the Custodian has expended its
own funds (exclusive of out-of-pocket expenses) to pay for
such securities and other property in accord with
instructions from the Fund, as required by accepted industry
practice or as the Custodian may elect in effecting the
execution of the Fund's instructions.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its
execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any
time by mutual agreement of the parties hereto and may be
45
<PAGE>
terminated by either party by an instrument in writing
delivered or mailed, postage prepaid to the other party,
such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a
Portfolio act under Section 2.10 hereof in the absence of
receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors of the Fund
has approved the initial use of a particular Securities
System by such Portfolio and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that
the Board of Directors has reviewed the use by such
Portfolio of such Securities System, as required in each
case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not with respect to
a Portfolio act under Section 2.10A hereof in the absence of
receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors has approved
the initial use of the Direct Paper System by such Portfolio
and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors has
reviewed the use by such Portfolio of the Direct Paper
System; provided further, however, that the Fund shall not
amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of
46
<PAGE>
the Articles of Incorporation, and further provided, that
the Fund on behalf of one or more of the Portfolios may at
any time by action of its Board of Directors (i) substitute
another bank or trust company for the Custodian by giving
notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian
by the Comptroller of the Currency or upon the happening of
a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf
of each applicable Portfolio shall pay to the Custodian such
compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for
its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more
of the Portfolios shall be appointed by the Board of
Directors of the Fund, the Custodian shall, upon
termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio then
held by it hereunder and shall transfer to an account of the
successor custodian all of the securities of each such
Portfolio held in a Securities System.
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<PAGE>
If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified
copy of a vote of the Board of Directors of the Fund,
deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with
such vote.
In the event that no written order designating a
Successor custodian or certified copy of a vote of the Board
of Directors shall have been delivered to the Custodian on
or before the date when such termination shall become
effective, Men the Custodian shall have the right to deliver
to a bank or trust company, which is a "bank" as defined in
the Investment Company Act of 1940, doing business in
Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown
by its last published report, of not less than $25,000,000,
all securities, funds and other properties held by the
Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all
other property held by it under this Contract on behalf of
each applicable Portfolio and to transfer to an account of
such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such
bank or trust company shall be the successor of the
Custodian under this Contract.
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<PAGE>
In the event that securities, funds and other
properties remain in the possession of the Custodian after
the date of termination hereof owing to failure of the Fund
to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its
services during such period as the Custodian retains
possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties
and obligations of the Custodian shall remain in full force
and effect.
16. Interprecive and Additional Provisions
In connection with the operation of this Contract, the
Custodian and the Fund on behalf of each of the Portfolios,
may from time to time agree on such provisions interpretive
of or in addition to the provisions of this Contract as may
in their joint opinion be consistent with the general tenor
of this Contract. Any such interpretive or additional
provisions shall be in a writing signed by both parties and
shall be annexed hereto, provided that no such interpretive
or additional provisions shall contravene any applicable
federal or state regulations or any provision of the
Articles of Incorporation of the Fund. No interpretive or
additional provisions made as provided in the preceding
49
<PAGE>
sentence shall be deemed to be an amendment of this
Contract.
17. Additional Funds
In the event that the Fund establishes one or more
series of Shares in addition to the Money Market Portfolio,
the Growth Portfolio, the Growth and Income Portfolio, the
U.S. Government/High Grade Securities Portfolio, the High-
Yield Portfolio, the Total Return Portfolio, the
International Portfolio, the Short-Term Multi-Market
Portfolio, and the Global Bond Portfolio with respect to
which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the
Custodian in writing, and if the Custodian agrees in writing
to provide such services, such series of Shares shall become
a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions
thereof interpreted under and in accordance with laws of The
Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the
date hereof, all prior contracts between the Fund on behalf
of each of the Portfolios and the Custodian relating to the
custody of the Fund's assets.
50
<PAGE>
20. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires
banks which hold securities for the account of customers to
respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of
that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In
order to comply with the rule, we need you to indicate
whether you authorize us to provide Your name, address, and
share position to requesting companies whose stock You own.
If you tell us "no", we will not provide this information to
requesting companies. If you tell us "yes" or do not check
either "yes" or "no" below, we are required by the rule to
treat you as consenting to disclosure of this information
for all securities owned by you or any funds or accounts
established by you. For your protection, the Rule prohibits
the requesting company from using your name and address for
any purpose other than corporate communications. Please
indicate below whether you consent or object by checking one
of the alternatives below.
YES [ ] You are authorized to release our name,
address, and share positions.
NO [X] You are not authorized to release our name,
address, and share positions.
51
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused
this instrument to be executed in its name and behalf by its
duly authorized representative and its seal to be hereunder
affixed as of the 26th day of March 1993.
ATTEST ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
/s/ Jacqueline White BY /s/ Edmund P. Bergan, Jr.
____________________ _____________________________
Jacqueline White Edmund P. Bergan, Jr.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ M.E. Bonono By /s/ Ronald E. Logue
___________________ _____________________________
M.E. Bonono Ronald E. Logue
Assistant Secretary Executive Vice President
52
00250292.BC8
<PAGE>
Schedule A
The following foreign banking institutions and foreign
securities depositories have been approved by the Board of
Directors of Alliance Variable Products Series Fund, Inc.
for use as sub-custodians for the Fund's securities and
other assets:
(Insert banks and securities depositories)
Certified:
_________________________
Fund's Authorized Officer
Date:____________________
00250292.BC8
<PAGE>
EXHIBIT (8) (B)
AMENDMENT TO CUSTODIAN CONTRACT
Agreement made by and between State Street and Trust Company
(the "Custodian") and Alliance Variable Products Series Fund,
Inc. (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a
custodian contract dated March 26, 1993 (the "Custodian
Contract") governing the terms and conditions under which the
Custodian maintains custody of the securities and other assets of
the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms
and conditions under which the Custodian maintains the Fund's
securities and other non-cash property in the custody of certain
foreign sub-custodians in conformity with the requirements of
Rule 17f-5 under the Investment Company Act of 1940, as amended.
NOW THEREFORE, in consideration of the premises and covenants
contained herein, the Custodian and the Fund hereby amend the
Custodian Contract by the addition of the following terms and
provisions;
1. Notwithstanding any provisions any provisions to the
contrary set forth in the Custodian Contract, the Custodian may
hold securities and other non-cash property for all of its
customers, including the Fund, with a foreign sub-custodian in a
single account that is identified as belonging to the Custodian
for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities entry those
securities and other non-cash securities and other non-cash
property belonging to the Fund and (ii) the Custodian shall
require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of
the foreign sub- custodian or of others.
2. Except as specifically superseded or modified herein,
the terms and provisions of the Custodian Contract shall continue
to apply with full force and effect.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed as a sealed instrument in its name and
behalf by its duly authorized representative this 4th day of
June, 1996.
ALLIANCE VARIABLE PRODUCTS SERIES
FUND, INC.
By: /s/ Edmund P. Bergan, Jr.
______________________________
Title: Secretary
___________________________
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
______________________________
Title: Executive Vice President
___________________________
00250292.BD2 2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the
captions "Financial Highlights" and "General Information -
Independent Auditors" and to the use of our report dated
February 7, 1997, in this Registration Statement (Form N-1A
33-18647) of Alliance Variable Products Series Fund, Inc.
/s/ ERNST & YOUNG LLP
New York, New York
May 1, 1997
00250292.AV1
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Short Term Multi Market Portfolio
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 6,928,674
<INVESTMENTS-AT-VALUE> 6,930,193
<RECEIVABLES> 158,906
<ASSETS-OTHER> 547
<OTHER-ITEMS-ASSETS> 56,830
<TOTAL-ASSETS> 7,146,476
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34,172
<TOTAL-LIABILITIES> 34,172
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,805,767
<SHARES-COMMON-STOCK> 662,827
<SHARES-COMMON-PRIOR> 298,038
<ACCUMULATED-NII-CURRENT> 346,901
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,097,934)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 57,570
<NET-ASSETS> 7,112,304
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 356,592
<OTHER-INCOME> 0
<EXPENSES-NET> 48,565
<NET-INVESTMENT-INCOME> 308,027
<REALIZED-GAINS-CURRENT> 48,358
<APPREC-INCREASE-CURRENT> 107,268
<NET-CHANGE-FROM-OPS> 463,653
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 369,515
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 664,791
<NUMBER-OF-SHARES-REDEEMED> 336,158
<SHARES-REINVESTED> 36,156
<NET-CHANGE-IN-ASSETS> 3,960,226
<ACCUMULATED-NII-PRIOR> 369,422
<ACCUMULATED-GAINS-PRIOR> (1,107,325)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 28,116
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<GROSS-EXPENSE> 107,038
<AVERAGE-NET-ASSETS> 5,112,079
<PER-SHARE-NAV-BEGIN> 10.58
<PER-SHARE-NII> .64
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<PER-SHARE-DIVIDEND> .82
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<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> Growth and Income Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 113,632,820
<INVESTMENTS-AT-VALUE> 126,364,134
<RECEIVABLES> 508,392
<ASSETS-OTHER> 61,147
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 126,933,673
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 204,268
<TOTAL-LIABILITIES> 204,268
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 103,579,424
<SHARES-COMMON-STOCK> 7,727,283
<SHARES-COMMON-PRIOR> 2,658,797
<ACCUMULATED-NII-CURRENT> 1,269,248
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,149,428
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,731,305
<NET-ASSETS> 126,729,405
<DIVIDEND-INCOME> 1,662,492
<INTEREST-INCOME> 278,686
<OTHER-INCOME> 0
<EXPENSES-NET> 663,485
<NET-INVESTMENT-INCOME> 1,277,693
<REALIZED-GAINS-CURRENT> 9,400,260
<APPREC-INCREASE-CURRENT> 8,263,950
<NET-CHANGE-FROM-OPS> 18,941,903
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,128,565
<DISTRIBUTIONS-OF-GAINS> 11,815,383
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,431,728
<NUMBER-OF-SHARES-REDEEMED> 260,259
<SHARES-REINVESTED> 897,017
<NET-CHANGE-IN-ASSETS> 84,736,577
<ACCUMULATED-NII-PRIOR> 1,130,049
<ACCUMULATED-GAINS-PRIOR> 11,553,964
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 506,294
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 665,466
<AVERAGE-NET-ASSETS> 81,007,070
<PER-SHARE-NAV-BEGIN> 15.79
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> 3.18
<PER-SHARE-DIVIDEND> .25
<PER-SHARE-DISTRIBUTIONS> 2.56
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.40
<EXPENSE-RATIO> .82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> Global Bond Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 17,078,982
<INVESTMENTS-AT-VALUE> 17,256,550
<RECEIVABLES> 410,081
<ASSETS-OTHER> 516,698
<OTHER-ITEMS-ASSETS> 22,695
<TOTAL-ASSETS> 18,206,024
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,934
<TOTAL-LIABILITIES> 88,934
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,801,073
<SHARES-COMMON-STOCK> 1,542,961
<SHARES-COMMON-PRIOR> 950,828
<ACCUMULATED-NII-CURRENT> 920,567
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 199,223
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 196,227
<NET-ASSETS> 18,117,090
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,004,520
<OTHER-INCOME> 0
<EXPENSES-NET> 141,423
<NET-INVESTMENT-INCOME> 863,097
<REALIZED-GAINS-CURRENT> 276,324
<APPREC-INCREASE-CURRENT> (125,897)
<NET-CHANGE-FROM-OPS> 1,013,524
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,035,617
<DISTRIBUTIONS-OF-GAINS> 309,324
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 542,902
<NUMBER-OF-SHARES-REDEEMED> 73,483
<SHARES-REINVESTED> 122,714
<NET-CHANGE-IN-ASSETS> 6,564,113
<ACCUMULATED-NII-PRIOR> 1,034,881
<ACCUMULATED-GAINS-PRIOR> 289,940
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97,431
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 171,828
<AVERAGE-NET-ASSETS> 14,989,440
<PER-SHARE-NAV-BEGIN> 12.15
<PER-SHARE-NII> .67
<PER-SHARE-GAIN-APPREC> .01
<PER-SHARE-DIVIDEND> .84
<PER-SHARE-DISTRIBUTIONS> .25
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.74
<EXPENSE-RATIO> .94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> Premier Growth Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 78,612,333
<INVESTMENTS-AT-VALUE> 96,055,825
<RECEIVABLES> 487,680
<ASSETS-OTHER> 3,737
<OTHER-ITEMS-ASSETS> 2,657
<TOTAL-ASSETS> 96,549,899
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 115,591
<TOTAL-LIABILITIES> 115,591
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,614,786
<SHARES-COMMON-STOCK> 6,143,896
<SHARES-COMMON-PRIOR> 1,644,774
<ACCUMULATED-NII-CURRENT> 323,427
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (947,397)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,443,492
<NET-ASSETS> 96,434,308
<DIVIDEND-INCOME> 799,656
<INTEREST-INCOME> 117,231
<OTHER-INCOME> 0
<EXPENSES-NET> 593,193
<NET-INVESTMENT-INCOME> 323,694
<REALIZED-GAINS-CURRENT> (442,478)
<APPREC-INCREASE-CURRENT> 14,126,172
<NET-CHANGE-FROM-OPS> 14,007,388
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 316,135
<DISTRIBUTIONS-OF-GAINS> 17,322,907
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,544,816
<NUMBER-OF-SHARES-REDEEMED> 307,428
<SHARES-REINVESTED> 1,261,734
<NET-CHANGE-IN-ASSETS> 67,156,014
<ACCUMULATED-NII-PRIOR> 312,649
<ACCUMULATED-GAINS-PRIOR> 16,821,207
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 624,414
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 768,192
<AVERAGE-NET-ASSETS> 62,441,400
<PER-SHARE-NAV-BEGIN> 17.80
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> 3.29
<PER-SHARE-DIVIDEND> .1
<PER-SHARE-DISTRIBUTIONS> 5.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.70
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> US Gov't/High Grade Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 28,701,259
<INVESTMENTS-AT-VALUE> 28,791,704
<RECEIVABLES> 390,346
<ASSETS-OTHER> 185
<OTHER-ITEMS-ASSETS> 15,798
<TOTAL-ASSETS> 29,198,033
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48,129
<TOTAL-LIABILITIES> 48,129
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,621,609
<SHARES-COMMON-STOCK> 2,531,426
<SHARES-COMMON-PRIOR> 1,453,146
<ACCUMULATED-NII-CURRENT> 1,370,536
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 54,933
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 102,826
<NET-ASSETS> 29,149,904
<DIVIDEND-INCOME> 4,725
<INTEREST-INCOME> 1,644,239
<OTHER-INCOME> 0
<EXPENSES-NET> 233,341
<NET-INVESTMENT-INCOME> 1,425,623
<REALIZED-GAINS-CURRENT> (5,171)
<APPREC-INCREASE-CURRENT> (477,962)
<NET-CHANGE-FROM-OPS> 942,490
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 621,506
<DISTRIBUTIONS-OF-GAINS> 289,591
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,420,578
<NUMBER-OF-SHARES-REDEEMED> 426,894
<SHARES-REINVESTED> 84,596
<NET-CHANGE-IN-ASSETS> 12,203,385
<ACCUMULATED-NII-PRIOR> 620,469
<ACCUMULATED-GAINS-PRIOR> 295,645
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 145,707
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 237,025
<AVERAGE-NET-ASSETS> 24,284,527
<PER-SHARE-NAV-BEGIN> 11.66
<PER-SHARE-NII> .66
<PER-SHARE-GAIN-APPREC> (.39)
<PER-SHARE-DIVIDEND> .28
<PER-SHARE-DISTRIBUTIONS> .13
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.52
<EXPENSE-RATIO> .92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> Total Return Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 23,976,844
<INVESTMENTS-AT-VALUE> 25,731,347
<RECEIVABLES> 217,909
<ASSETS-OTHER> 587
<OTHER-ITEMS-ASSETS> 4,826
<TOTAL-ASSETS> 25,954,669
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 79,319
<TOTAL-LIABILITIES> 79,319
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,620,047
<SHARES-COMMON-STOCK> 1,768,899
<SHARES-COMMON-PRIOR> 643,972
<ACCUMULATED-NII-CURRENT> 481,043
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,019,757
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,754,503
<NET-ASSETS> 25,875,350
<DIVIDEND-INCOME> 204,786
<INTEREST-INCOME> 440,995
<OTHER-INCOME> 0
<EXPENSES-NET> 165,046
<NET-INVESTMENT-INCOME> 480,735
<REALIZED-GAINS-CURRENT> 1,019,837
<APPREC-INCREASE-CURRENT> 1,338,504
<NET-CHANGE-FROM-OPS> 2,839,076
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 88,093
<DISTRIBUTIONS-OF-GAINS> 44,705
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,193,848
<NUMBER-OF-SHARES-REDEEMED> 78,997
<SHARES-REINVESTED> 10,076
<NET-CHANGE-IN-ASSETS> 17,632,909
<ACCUMULATED-NII-PRIOR> 87,921
<ACCUMULATED-GAINS-PRIOR> 45,105
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 108,845
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 195,828
<AVERAGE-NET-ASSETS> 17,415,218
<PER-SHARE-NAV-BEGIN> 12.80
<PER-SHARE-NII> .27
<PER-SHARE-GAIN-APPREC> 1.66
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.63
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> International Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 42,799,658
<INVESTMENTS-AT-VALUE> 44,224,641
<RECEIVABLES> 117,834
<ASSETS-OTHER> 152,129
<OTHER-ITEMS-ASSETS> 4,941
<TOTAL-ASSETS> 44,499,545
<PAYABLE-FOR-SECURITIES> 65,866
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 109,583
<TOTAL-LIABILITIES> 175,449
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,661,271
<SHARES-COMMON-STOCK> 2,976,776
<SHARES-COMMON-PRIOR> 1,175,986
<ACCUMULATED-NII-CURRENT> 462,109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 776,481
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,424,235
<NET-ASSETS> 44,324,096
<DIVIDEND-INCOME> 529,146
<INTEREST-INCOME> 156,513
<OTHER-INCOME> 0
<EXPENSES-NET> 290,186
<NET-INVESTMENT-INCOME> 395,473
<REALIZED-GAINS-CURRENT> 906,640
<APPREC-INCREASE-CURRENT> 684,246
<NET-CHANGE-FROM-OPS> 1,986,359
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 155,834
<DISTRIBUTIONS-OF-GAINS> 244,881
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,116,357
<NUMBER-OF-SHARES-REDEEMED> 342,716
<SHARES-REINVESTED> 27,149
<NET-CHANGE-IN-ASSETS> 27,782,461
<ACCUMULATED-NII-PRIOR> 154,797
<ACCUMULATED-GAINS-PRIOR> 182,395
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 305,459
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 290,186
<AVERAGE-NET-ASSETS> 30,545,930
<PER-SHARE-NAV-BEGIN> 14.07
<PER-SHARE-NII> .19
<PER-SHARE-GAIN-APPREC> .83
<PER-SHARE-DIVIDEND> .08
<PER-SHARE-DISTRIBUTIONS> .12
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.89
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> Money Market Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 64,186,996
<INVESTMENTS-AT-VALUE> 64,186,996
<RECEIVABLES> 610,012
<ASSETS-OTHER> 253,962
<OTHER-ITEMS-ASSETS> 4,969
<TOTAL-ASSETS> 65,055,939
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,648
<TOTAL-LIABILITIES> 286,648
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 64,768,588
<SHARES-COMMON-STOCK> 64,769,391
<SHARES-COMMON-PRIOR> 28,092,065
<ACCUMULATED-NII-CURRENT> 1,046
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (343)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 64,769,291
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,685,518
<OTHER-INCOME> 0
<EXPENSES-NET> 348,634
<NET-INVESTMENT-INCOME> 2,336,884
<REALIZED-GAINS-CURRENT> (343)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,336,541
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,336,884
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 178,619,585
<NUMBER-OF-SHARES-REDEEMED> 144,278,841
<SHARES-REINVESTED> 2,336,582
<NET-CHANGE-IN-ASSETS> 36,676,983
<ACCUMULATED-NII-PRIOR> 803
<ACCUMULATED-GAINS-PRIOR> 243
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 251,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 349,786
<AVERAGE-NET-ASSETS> 50,351,037
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> North American Gov't Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 15,384,697
<INVESTMENTS-AT-VALUE> 16,521,272
<RECEIVABLES> 156,246
<ASSETS-OTHER> 13,223
<OTHER-ITEMS-ASSETS> 30,705
<TOTAL-ASSETS> 16,721,446
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25,796
<TOTAL-LIABILITIES> 25,796
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,463,232
<SHARES-COMMON-STOCK> 1,349,031
<SHARES-COMMON-PRIOR> 694,380
<ACCUMULATED-NII-CURRENT> 1,077,786
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,290)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,156,922
<NET-ASSETS> 16,695,650
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,350,439
<OTHER-INCOME> 0
<EXPENSES-NET> 107,015
<NET-INVESTMENT-INCOME> 1,243,424
<REALIZED-GAINS-CURRENT> (165,830)
<APPREC-INCREASE-CURRENT> 841,208
<NET-CHANGE-FROM-OPS> 1,918,802
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 49,608
<DISTRIBUTIONS-OF-GAINS> 3,969
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 933,567
<NUMBER-OF-SHARES-REDEEMED> 283,721
<SHARES-REINVESTED> 4,805
<NET-CHANGE-IN-ASSETS> 9,417,723
<ACCUMULATED-NII-PRIOR> 47,940
<ACCUMULATED-GAINS-PRIOR> 3,539
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 73,221
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 158,972
<AVERAGE-NET-ASSETS> 11,264,786
<PER-SHARE-NAV-BEGIN> 10.48
<PER-SHARE-NII> 1.26
<PER-SHARE-GAIN-APPREC> .69
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.38
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Utility Income Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13,527,099
<INVESTMENTS-AT-VALUE> 14,626,322
<RECEIVABLES> 147,424
<ASSETS-OTHER> 106,107
<OTHER-ITEMS-ASSETS> 7,196
<TOTAL-ASSETS> 14,887,049
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,256
<TOTAL-LIABILITIES> 30,256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,514,950
<SHARES-COMMON-STOCK> 1,170,361
<SHARES-COMMON-PRIOR> 520,402
<ACCUMULATED-NII-CURRENT> 289,028
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (46,408)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,099,223
<NET-ASSETS> 14,856,793
<DIVIDEND-INCOME> 329,669
<INTEREST-INCOME> 68,250
<OTHER-INCOME> 0
<EXPENSES-NET> 106,196
<NET-INVESTMENT-INCOME> 291,723
<REALIZED-GAINS-CURRENT> (31,022)
<APPREC-INCREASE-CURRENT> 796,030
<NET-CHANGE-FROM-OPS> 1,056,731
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 81,842
<DISTRIBUTIONS-OF-GAINS> 155,981
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 776,031
<NUMBER-OF-SHARES-REDEEMED> 146,278
<SHARES-REINVESTED> 20,206
<NET-CHANGE-IN-ASSETS> 8,606,252
<ACCUMULATED-NII-PRIOR> 81,328
<ACCUMULATED-GAINS-PRIOR> 138,414
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 83,839
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 168,604
<AVERAGE-NET-ASSETS> 11,178,526
<PER-SHARE-NAV-BEGIN> 12.01
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .62
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.69
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> Global Dollar Gov't Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 8,152,185
<INVESTMENTS-AT-VALUE> 8,543,372
<RECEIVABLES> 1,041,311
<ASSETS-OTHER> 8,756
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,593,439
<PAYABLE-FOR-SECURITIES> 727,562
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,471
<TOTAL-LIABILITIES> 746,033
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,232,106
<SHARES-COMMON-STOCK> 617,736
<SHARES-COMMON-PRIOR> 316,166
<ACCUMULATED-NII-CURRENT> 482,953
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 741,160
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 391,187
<NET-ASSETS> 8,847,406
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 535,472
<OTHER-INCOME> 0
<EXPENSES-NET> 53,688
<NET-INVESTMENT-INCOME> 481,784
<REALIZED-GAINS-CURRENT> 745,244
<APPREC-INCREASE-CURRENT> 126,646
<NET-CHANGE-FROM-OPS> 1,353,674
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 191,319
<DISTRIBUTIONS-OF-GAINS> 13,292
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 373,824
<NUMBER-OF-SHARES-REDEEMED> 89,291
<SHARES-REINVESTED> 17,037
<NET-CHANGE-IN-ASSETS> 5,069,311
<ACCUMULATED-NII-PRIOR> 188,559
<ACCUMULATED-GAINS-PRIOR> 13,137
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42,385
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 111,186
<AVERAGE-NET-ASSETS> 5,651,393
<PER-SHARE-NAV-BEGIN> 11.95
<PER-SHARE-NII> 1.10
<PER-SHARE-GAIN-APPREC> 1.78
<PER-SHARE-DIVIDEND> .48
<PER-SHARE-DISTRIBUTIONS> .03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.32
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> Growth Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 119,450,096
<INVESTMENTS-AT-VALUE> 139,667,222
<RECEIVABLES> 433,337
<ASSETS-OTHER> 203,355
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 140,303,914
<PAYABLE-FOR-SECURITIES> 1,447,797
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 168,226
<TOTAL-LIABILITIES> 1,616,023
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111,723,304
<SHARES-COMMON-STOCK> 7,739,999
<SHARES-COMMON-PRIOR> 3,177,065
<ACCUMULATED-NII-CURRENT> 262,537
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,484,948
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,217,102
<NET-ASSETS> 138,687,891
<DIVIDEND-INCOME> 843,192
<INTEREST-INCOME> 289,632
<OTHER-INCOME> 0
<EXPENSES-NET> 820,607
<NET-INVESTMENT-INCOME> 312,217
<REALIZED-GAINS-CURRENT> 6,454,479
<APPREC-INCREASE-CURRENT> 16,515,677
<NET-CHANGE-FROM-OPS> 23,382,373
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 230,200
<DISTRIBUTIONS-OF-GAINS> 1,507,259
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,744,489
<NUMBER-OF-SHARES-REDEEMED> 292,788
<SHARES-REINVESTED> 111,233
<NET-CHANGE-IN-ASSETS> 93,468,180
<ACCUMULATED-NII-PRIOR> 266,542
<ACCUMULATED-GAINS-PRIOR> 1,451,706
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 664,973
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 828,767
<AVERAGE-NET-ASSETS> 88,663,114
<PER-SHARE-NAV-BEGIN> 14.23
<PER-SHARE-NII> .06
<PER-SHARE-GAIN-APPREC> 3.95
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.92
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> Worldwide Privatization Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 17,017,779
<INVESTMENTS-AT-VALUE> 18,346,418
<RECEIVABLES> 90,545
<ASSETS-OTHER> 397,822
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,834,785
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,972
<TOTAL-LIABILITIES> 27,972
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,749,589
<SHARES-COMMON-STOCK> 1,432,879
<SHARES-COMMON-PRIOR> 532,219
<ACCUMULATED-NII-CURRENT> 308,447
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 415,378
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,333,399
<NET-ASSETS> 18,806,813
<DIVIDEND-INCOME> 280,347
<INTEREST-INCOME> 89,157
<OTHER-INCOME> 0
<EXPENSES-NET> 109,448
<NET-INVESTMENT-INCOME> 260,056
<REALIZED-GAINS-CURRENT> 507,830
<APPREC-INCREASE-CURRENT> 1,117,579
<NET-CHANGE-FROM-OPS> 1,885,465
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 90,574
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 977,499
<NUMBER-OF-SHARES-REDEEMED> 84,263
<SHARES-REINVESTED> 7,424
<NET-CHANGE-IN-ASSETS> 12,860,039
<ACCUMULATED-NII-PRIOR> 90,277
<ACCUMULATED-GAINS-PRIOR> (43,764)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 115,208
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 213,498
<AVERAGE-NET-ASSETS> 11,520,825
<PER-SHARE-NAV-BEGIN> 11.17
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> 1.78
<PER-SHARE-DIVIDEND> .10
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.13
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 14
<NAME> Conservative Investors Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 20,813,226
<INVESTMENTS-AT-VALUE> 21,536,211
<RECEIVABLES> 205,313
<ASSETS-OTHER> 24,282
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,765,806
<PAYABLE-FOR-SECURITIES> 2,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,625
<TOTAL-LIABILITIES> 36,613
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,450,861
<SHARES-COMMON-STOCK> 1,800,117
<SHARES-COMMON-PRIOR> 630,671
<ACCUMULATED-NII-CURRENT> 607,910
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (52,673)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 723,095
<NET-ASSETS> 21,729,193
<DIVIDEND-INCOME> 63,935
<INTEREST-INCOME> 695,363
<OTHER-INCOME> 0
<EXPENSES-NET> 147,764
<NET-INVESTMENT-INCOME> 611,534
<REALIZED-GAINS-CURRENT> (55,570)
<APPREC-INCREASE-CURRENT> 466,246
<NET-CHANGE-FROM-OPS> 1,022,210
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 127,029
<DISTRIBUTIONS-OF-GAINS> 56,297
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,387,334
<NUMBER-OF-SHARES-REDEEMED> 234,084
<SHARES-REINVESTED> 16,196
<NET-CHANGE-IN-ASSETS> 14,309,473
<ACCUMULATED-NII-PRIOR> 127,336
<ACCUMULATED-GAINS-PRIOR> 55,263
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 116,656
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 217,642
<AVERAGE-NET-ASSETS> 15,554,118
<PER-SHARE-NAV-BEGIN> 11.76
<PER-SHARE-NII> .45
<PER-SHARE-GAIN-APPREC> (.01)
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.07
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> Growth Investors Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,917,731
<INVESTMENTS-AT-VALUE> 10,658,787
<RECEIVABLES> 70,784
<ASSETS-OTHER> 8,959
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,738,530
<PAYABLE-FOR-SECURITIES> 2,987
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26,207
<TOTAL-LIABILITIES> 29,194
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,615,073
<SHARES-COMMON-STOCK> 840,388
<SHARES-COMMON-PRIOR> 419,292
<ACCUMULATED-NII-CURRENT> 177,700
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 175,410
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 741,153
<NET-ASSETS> 10,709,336
<DIVIDEND-INCOME> 78,863
<INTEREST-INCOME> 183,154
<OTHER-INCOME> 0
<EXPENSES-NET> 84,101
<NET-INVESTMENT-INCOME> 177,916
<REALIZED-GAINS-CURRENT> 175,340
<APPREC-INCREASE-CURRENT> 507,668
<NET-CHANGE-FROM-OPS> 860,924
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 55,626
<DISTRIBUTIONS-OF-GAINS> 16,764
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 646,812
<NUMBER-OF-SHARES-REDEEMED> 231,754
<SHARES-REINVESTED> 6,038
<NET-CHANGE-IN-ASSETS> 5,731,220
<ACCUMULATED-NII-PRIOR> 55,987
<ACCUMULATED-GAINS-PRIOR> 16,257
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 66,395
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 164,166
<AVERAGE-NET-ASSETS> 8,852,734
<PER-SHARE-NAV-BEGIN> 11.87
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> .72
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .02
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.74
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 16
<NAME> Technology Portfolio
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 25,712,695
<INVESTMENTS-AT-VALUE> 27,772,469
<RECEIVABLES> 185,706
<ASSETS-OTHER> 156,016
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,114,191
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30,760
<TOTAL-LIABILITIES> 30,760
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,235,838
<SHARES-COMMON-STOCK> 2,543,479
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 142,959
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (355,160)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,059,794
<NET-ASSETS> 28,083,431
<DIVIDEND-INCOME> 7,327
<INTEREST-INCOME> 252,088
<OTHER-INCOME> 0
<EXPENSES-NET> 116,466
<NET-INVESTMENT-INCOME> 142,949
<REALIZED-GAINS-CURRENT> (355,160)
<APPREC-INCREASE-CURRENT> 2,059,794
<NET-CHANGE-FROM-OPS> 1,847,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,807,022
<NUMBER-OF-SHARES-REDEEMED> 263,543
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 28,083,431
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 122,595
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 198,843
<AVERAGE-NET-ASSETS> 13,124,552
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> .93
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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